A Minute With...

Seung-Hyun Hong, expert on the economics of the U.S. Postal Service

2/18/2013  6:30 am

The U.S. Postal Service recently announced that it would end Saturday delivery for letters beginning the first week of August. Seung-Hyun Hong, a University of Illinois professor of economics, has studied the Postal Service’s precarious financial situation. In an interview with News Bureau business and law editor Phil Ciciora, Hong discusses what such drastic changes mean to the beleaguered but beloved agency whose history dates back to the Second Continental Congress.

Will ending Saturday delivery ultimately help or hurt the U.S. Postal Service? Wouldn’t this only deepen the agency’s financial problems?

image of professor seung-hyun hongEnding Saturday delivery will certainly reduce costs, but whether it will ultimately help or hurt the Postal Service depends on how this change will affect the demand for postal services.

As far as most consumers are concerned, this change will not matter much, since most consumers are already using email, fax or other delivery services for more urgent mails. However, five-day delivery could reduce business customers’ demand for postal services, because this change may lead some businesses to rely less on postal services for their advertisements and to switch to alternative media such as the Internet. It is unclear how much revenue from advertising mail will be reduced, but the potential change in business customers’ demand will likely determine whether or not five-day delivery will alleviate the agency’s financial problems.

Unlike any other government agency, the U.S. Postal Service is mandated to prepay for the next 75 years of future retiree health care benefits, which accounts for $5.5 billion annually. Should Congress seek to undo this mandate?

The Postal Accountability and Enhancement Act of 2006 required the U.S. Postal Service to make annual payments of about $5.5 billion from 2007 through 2016 to pre-fund its retiree health benefits. In the private sector and the government sector, large unfunded liabilities for retiree pension and health benefits have led to the termination of the promised benefits or some actions to reduce the benefits. In that regard, avoiding potential changes in benefits would be an ideal goal, and pre-funding would be an ideal approach to achieve the goal. 

However, given that the Postal Service already defaulted on its payment for pre-funding in 2012, and its revenues are expected to decline even further, it becomes questionable whether such an approach should be the top priority of the Postal Service. In this regard, Congress should re-examine the viability of the current pre-funding approach and the ultimate goal of pre-funding.

The price of a first-class stamp is 46 cents. Should we expect another postal rate increase? Do you foresee more branch closures?

An increase in postal rates could increase the revenue, as long as it does not decrease the demand for postal services. However, this is not guaranteed, and so simply increasing postal rates may not necessarily increase the agency’s revenue. Nevertheless, given the rate increases in the past, another increase cannot be ruled out. As for branch closures, it would potentially lead to cost saving, and the Postal Service will likely continue to consider this option. However, it is unlikely to be a fundamental solution to the agency’s financial problems.

The U.S. Postal Service has already increased postage and reduced its staff; now it wants to cut services. Should we be worried about the long-term viability of our mail system, or is this a manufactured crisis brought about by chronic underfunding and the ill-conceived prepayment mandate?

The fundamental problem for the U.S. Postal Service is that, as more consumers rely on electronic forms of communication, the revenues from traditional sources such as letters and advertising mail are declining. It also has not been successful in seeking new sources of revenues. This problem has been aggravated by the pre-funding mandate from the Postal Accountability and Enhancement Act, but it is not necessarily caused by the mandate. One of the challenges in addressing the problem is that the scope of the Postal Service’s business is regulated, which has further restricted new sources of revenues. Therefore, unless this problem is addressed, we may have to be worried about the long-term viability of our mail system.

 

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