U.S. Postal Service Braced for Massive Cuts

Like many other businesses around the country, the U.S. Postal Service is deeply in debt and struggling to survive.

The overwhelming popularity of e-mail correspondence, in tandem with a sluggish economy, has led to drastic changes in the traditional mail services. The postal service -- a quasi-government agency that doesn't receive federal funding -- finances its operations almost entirely through the sale of postage stamps, which are also in steep decline.

Over the past five years, the volume of mail sent through the postal service has plunged by 20 percent -- while prices have remained frozen at the inflation rate -- with significant drops witnessed in first-class mail (traditionally the postal service’s cash cow).

By law, the USPS is mandated to break even -- but for fiscal 2011 it is expecting to post a $8.3 billion shortfall – on the heels of an $8.5 billion net loss in fiscal year 2010.

Postmaster General Patrick Donahoe is proposing some dramatic changes to cut costs -- including the firing of one-fifth of all employees (some 220,000 people) either through layoffs or attrition; the elimination of Saturday mail delivery; and the closing of nearly 4,000 post offices across the country.

Other spiraling costs facing the USPS include retiree benefits, a $5.5-billion annual expense that Donahoe wants to significantly cut.

Moreover, Congress wants the Postal Service to prefund its health care and retirement benefit plans. Specifically, Congress envisions the USPS prefunding all retiree benefits for the next 75 years within 10 years – a directive that has led to huge annual deficits.

Consequently, Donahoe wants to get rid of costly government health and retirement plans and replace them with a low-cost plan funded directly by the USPS.

Our most significant area of cost is in compensation and benefits, and one key driver of those costs is simply the sheer size of our workforce,” the USPS said in a statement.

Based on current revenue and cost trends, and assuming a move to five-day delivery, the Postal Service can only afford a total workforce by 2015 of 425,000, which includes approximately 30 percent lower cost, more flexible, non-career employees.

However, Congress must approve all these measures -- and thus far, they have shown no inclination to do so.

Following the huge and unpopular federal bailouts handed out to auto companies, banks and financial institutions over the past few years, a financial rescue of the Postal Service by taxpayers would appear to be out of the question.

In fact, a recent survey from Rasmussen Reports quantified the public’s anger over government bailouts. Half of all adult Americans would endorse the layoffs of tens of thousands of postal workers rather than fork over subsidies to rescue the system.

Moreover, 75 percent of Americans would prefer to see a reduction in mail delivery services in lieu of a government financial lifesaver.

Thus, all these factors put the USPS in a bizarre and confounding bind.

Donahoe will likely face some stiff resistance to his cost-cutting plans from the unions, which have enjoyed some unusual perks that most private sector unions don't. Indeed, among other things, postal employees can't be laid off after six years* (a restriction Donahoe also wants to lift).

The issues of layoff protection and health benefits are specifically covered by our contract,” responded Fredric Rolando, president of the National Association of Letter Carriers union.

“Each of them has historically been covered in collective bargaining between NALC and USPS. The Congress of the United States does not engage in contract negotiations with unions and we do not believe they are about to do so.

However, the union may have little leverage in the current economic climate.

“The union is weakened by the same factors that have lowered the demand for postal services – e-mail, the Internet, and smartphones have revolutionized the transfer of information,” Stephen Bronars, senior labor economist at Welch Consulting in Washington, D.C., told International Business Times.

“The USPS is facing more competition than ever. The USPS will almost certainly prevail and end up cutting its workforce... The primary question is, how quickly this will occur. Will there be more layoffs or will more reductions occur because retiring postal workers won't be replaced?”

Bronars describes the USPS as a regulated monopoly.

“Other companies can't compete directly by delivering mail,” he explained. In return the post office has its own statutory debt limit and (since 2006) must prefund future retirees' health benefits. It must also pay competitive wages -- but economic studies have shown that postal workers earn 20 percent to 30 percent more than comparable private sector workers and receive better (and more expensive) benefits.

Bronars indicated that historically USPS workers have quit their jobs at an extremely low rate.

“A 2001 study reported that the average annual rate at which postal workers quit their jobs was 1.2 percent, much lower than in the private sector -- which was about 28 percent across all jobs in the information industry in the private sector in 2001,” he said.

“Although there are 200,000 fewer postal workers today than in 1999, historically USPS workers have not been subject to layoffs and reductions in force as in the private sector. Until recently, a USPS job was the closest thing in the US to a ‘job-for-life’.”

In its heyday, the post office used to generate profits – such retained earnings were plowed back into the service to pay off debt, according to Rick Geddes, associate professor in the Department of Policy Analysis and Management at Cornell University in Ithaca, N.Y., and an expert on the USPS.

Those days are long gone.

However, downsizing in the post office is nothing new – at least a decade ago the service saw the writing on the wall, what with the emergence of social media.

“Over the past ten years, mostly under the prior Postmaster General Jack Potter, about 100,000 postal workers have been eliminated, mostly through attrition,” said Geddes.

Over the past 10 years, the number of post office outlets fell from about 38,000 to 31,000.

In 2003, Michael A. Crew, professor of economics at Rutgers University, N.J., wrote a research piece in which he analyzed the inherent flaws of the postal service.

Regarding the USPS cost structure, Crew wrote: “Around 80 percent of USPS costs are labor and it has exceedingly limited control of these costs. The compensation of its unionized employees is not subject to traditional collective bargaining as practiced in private industry but interest arbitration.

Postal employees do not have the right to strike but in the event of a failure of their union to reach an agreement with USPS they take their case to binding arbitration, he continued. Thus, an outsider, an arbitrator, determines USPS principal input, wages.”

Crew added: “USPS has very little control of its labor costs and faces significant obstacles in achieving productivity improvements.”

Many of the gains that postal workers received – including the right to collective bargaining – arose in the wake of a 1970 strike which started in New York and spread to the rest of the country.

At that time, postal workers reportedly earned $6,100 annually – which was below the national median (with highest wages topping out at about $9,000).

The work stoppage was so effective (even the National Guard, who were called into service by then President Richard Nixon, couldn't adequately do the job), that the unions’ demands for higher salaries and better working conditions were primarily satisfied in just a few weeks.

Under the 1970 Postal Reorganization Act, the U.S. Post Office was renamed as the U.S. Postal Service and established as an “independent establishment of the executive branch.”

The world has since turned upside down for the postal service.

Now, at the beginning of the 21st century, a reduction in postal service would likely hurt elderly people who live in remote rural areas who are still dependent on the mail for Social Security checks, medication, etc., since FedEx and UPS typically don't serve remote areas.

Moreover, the loss of postal jobs would disproportionately hit women and minorities, According to a recent report in the Atlanta Journal-Constitution, the postal workforce now is 37 percent female, 21 percent black, 8 percent Hispanic and 8 percent Asian.

The future for the postal service looks quite bleak, or at least radically smaller.

“The postal service of the future will be smaller, leaner and more competitive and it will continue to drive commerce, serve communities and deliver value,” Donahoe said.

Geddes surmises that the USPS is on the brink of dramatic changes.

“Something’s got to give at this juncture,” he said. “It will be interesting to see how the USPS, the unions and Congress arrive at a compromise solution to all these problems.”

*A prior version of this story incorrectly stated six months rather than six years.