A U.S. Postal System Default

The U.S. Postal System reminded Congress again that its financial problems are so dire that it may miss an obligation to pay $5.5 billion into health-benefit funds. The payments will not be made without a miracle. They are due in less than two weeks. The USPS joins a long line of government entities at the federal, state and local level that are out of money and not likely to receive aid.

Only two days ago the State Budget Crisis Task Force warned that many states lack the financial wherewithal to fund pensions and keep up traditional services for citizens. It was only two weeks ago that Stockton, Calif., filed Chapter 9 and said it would cut retiree benefits. The USPS’s problems may not appear related to these others at first. But they are. Governments that run out of money have been forced to drop decades-old promises to citizens and employees. And there is nothing to be done about it.

The argument about the origins of these problems will continue for years. Were they caused by the generosity of government, or the pressure unions place on them to offer greater benefits? Or, did the recession undermine what could have been a level of financial health that would have made the fulfillment of obligations possible? Most likely, the promises were too rich, because almost no level of financial health would have been enough. Assumptions about pension services and services to citizens have been based largely on an increase in the value of the funds needed. High returns have been undermined by the underperformance of many markets and exceedingly low interest rates. Neither was anticipated by most plans.

The possibility of default has become a reality among many governments, and the number of defaults will rise. The levels of pension and government obligations are much too large, and fund obligations can no longer be pressed further and further into the future. Even those workers who paid into funds for their entire work lives face lower payouts. And people who have paid taxes for just as long will receive less in government services than they reasonably expected.

Welcome to the new world of government services.

Douglas A. McIntyre