In this episode of Lehigh University’s College of Business IlLUminate podcast, we are speaking with Jesus Salas about whether the United States Postal Service (USPS) should—or even could—be privatized. It has been just over 50 years since the Postal Reorganization Act was enacted under the Nixon administration, transforming the old cabinet-level Post Office Department into a new independent government agency, the United States Postal Service. That law also, for the first time, required the Postal Service to break even financially. Today, USPS continues to accumulate huge debt and experienced widespread service disruptions amid severe budget cutbacks.
Salas is an associate professor in the College of Business' Perella Department of Finance. He's also a co-director of the Family Business Institute within the Martindale Center at Lehigh University. His teaching and research interests include investments, corporate finance, corporate governance, and corporate risk management.
He spoke with Jack Croft, host of the ilLUminate podcast. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.
Below is an edited excerpt from that conversation. Read the complete podcast transcript.
Jack Croft: I know that you've looked at the balance sheet for USPS, which is public record. What does that tell us about the business model?
Jesus Salas: The USPS is in terrible financial shape. They have unfunded pension liabilities of about $90 billion. And then they have additional debt of about $30 billion. On the other side, if you look at the assets of the USPS, they are about $35 billion. That means the company owes a lot more than it owns. So anybody who would want to purchase the USPS would probably also be acquiring those liabilities, right? If … you buy the USPS, you're also acquiring the $90 billion liability on the pensions. And you'd also be acquiring the $30 billion debt that the USPS has.
Now, the government could take over and pay those debts for the USPS. But that would just mean that the tax[payers] would be on the hook for that. And I'm not sure everybody wants to do that. It is difficult to imagine, therefore, how much the USPS is worth if we were to include the value of having to pay off these debts.
Croft: Let's start breaking it down then. What do you see as the main pros and cons of privatizing Postal Service in the U.S.? And let's start with the pros, the advantages that we would be most likely to see from it.
Salas: I clearly believe that a privatized USPS would be more efficient. Operating costs would probably fall. The pension problem would probably be resolved. There would probably be no more defined benefit plan. Yes, the employees would probably get a worse pension. However, let's be clear, a pension that promises lower payments is probably still better than a pension that now has low prospects of paying anything at all, right? I mean, right now, the pension that the USPS workers have, it's unlikely to pay off. It's just not sustainable. Innovation probably would also go up. Maybe Sunday delivery could become standard. Most importantly, the U.S. would never have to have the burden of figuring out what to do with the USPS again. So that's clearly a benefit for the government.
Croft: And the cons, what would be the main disadvantages that might come with privatization?
Salas: I think it's clear that we'd probably have to pay more. The cost of shipping mail and packages would probably go up. There would probably need to be some panel to regulate the USPS. And that's costly. You have to hire the panel. You have to oversee the company. It would be costly to regulate the USPS. The USPS would probably try to bribe the panel. These bribing costs, these oversight costs, all of these things would be costly. And, ultimately, we'd all be paying for that.
The USPS would likely be pushed to be allowed to charge a lot more to deliver to and from rural or remote areas. And maybe, eventually, they could get away with doing that. And also, in these rural and remote areas, the company would probably do whatever they can to slow down the delivery of packages and/or mail to these rural remote areas. So for sure, the rural remote areas would be the ones that are most likely to suffer the most from a privatization of the USPS.
Croft: So the bottom-line question is, is privatization a realistic option for USPS at this point?
Salas: Right now, I just don't even think it's possible to privatize the USPS. The pension system, the problem with the pension system, that has to be resolved. Then the U.S. probably also needs to think about and discuss how a regulated USPS would operate. We'd have to really think carefully about these things. There's economic theory on how you can regulate companies in order to maximize whatever the ultimate goal of the government would be.
So you really have to think about those things before you just start thinking about who are you going to sell it [to], and how much money you're going to get. There are just too many things that need to happen in order to prepare for a potential USPS privatization. I don't see right now any will by the government or by anybody to do any of these things at this point. So, therefore, I don't think it's anywhere in the neighborhood of time before the government is going to be doing that.
Croft: Does that mean it will always require the federal government to cover deficits?
Salas: Let's be clear about this. The USPS doesn't actually receive any direct money from the U.S. There are some indirect benefits because the federal government gives the USPS some preferred terms on their debt. Honestly, the U.S. government needs to put their foot down and clean up the USPS liability situation. Yes, this will probably cost money to taxpayers. However, the USPS cannot be sold. It cannot be improved until they solve these issues.
First of all, I'll say it first: I think that the USPS defined benefit program needs to be terminated, like today. Yes, the shipping rates will need to be raised. The first-class mail shipping, the stamps, they will need to go up. And we need to start funding some of the gap in the pension liabilities because that's not going to just go away. Finally, there probably will be a need for the U.S. government to cover some of those pension fund liabilities. If it were me, I would only consider this option after the U.S. terminates the defined benefit pension plan.
I guess I'm saying that the future does not look great for the USPS. But I think there are ways to fix the USPS. I just hope there's enough will from the government to actually do it.
Croft: So going back to how we started this discussion, 50 years from now, do you think other people will still be talking about a lot of these same issues regarding postal service in the United States?
Salas: I guess it all comes back to — the question you're really asking me is, how much faith do I have in government, right? And I guess that's a really, really big question. Based on what we're seeing right now from government, I would have to say that my prediction is that 50 years down the line, we're probably still going to be trying to figure out what to do with the USPS. Now, I hope that I'll change my mind. I'm not saying that it's impossible for the government to change the way that they're managing the USPS. But given the deadlock that exists in government right now, and given the unwillingness by government to address big problems, I just feel like it's very unlikely that in 50 years, we won't be talking about the problems with the USPS.