Rising Postal Rates? Don’t Cut Down the Direct Mail
What is the cause of rising postal rates?
The USPS has been struggling financially for a number of years. They have tried to cut costs by reducing operating hours, closing processing plants and mail sorting facilities, and reducing their workforce by about 30%.
This does not fix the underlying problem. The problem is that reduced service with higher prices doesn’t make sense for Postal customers, so it doesn’t make sense for the Postal Service either. With less people sending letters and bills through the U.S., they are losing revenue while still paying fixed costs such as retirement benefits to veterans dating back all the way to World War II which ironically cannot be changed because they are set in stone by Congress.
With declining volume and falling revenue, it seems the Postal Service is trapped. They just don’t know what to do to get out of their current financial predicament.
In many ways they are like a homeowner whose home has appreciated in value while they have been renting out rooms and renting out their attic. Now they are in a situation that they may not be able to afford the mortgage payment on their home while they rent out every room in their house. The Postal Service is a victim of its own success and as much as I would like them to be at fault, this is not true for the most part for most postmasters. The problem is the leadership of the USPS right now.
There are a number of combinations that could be made to fix this issue but you need to be careful in how you do it. If you just increase base rates above inflation or as some people have suggested, reduce service and increase prices, it would result in cuts for employees, resulting in a situation where the postmaster would have to hire more staff because he doesn’t know whom he can trust.
Don’t expect Congress to bail out the Postal Service. They don’t have the power to do so. Their control is limited to setting rates and creating legislation and they are not allowed by law to aid a government agency.
The Postal Service would be better off making some changes in their strategy, watch out for more on that later…
What is going to happen in the short term? Wouldn’t it be better for them if they just raised prices now before all of us wake up as postal customers and ask why we are paying more? The penny pinch from paying higher prices would hurt less than a reduction in services. It seems like it’s easier on everyone, but in fact it would hurt everyone, including themselves, greatly.
The Postal Service has to find a way to raise more revenue. They are hoping that Congress will grant them authority to raise rates above inflation. This would be a risky move for the Postal Service as there are a number of things in place that would limit their ability to raise rates, both legislatively and financially.
First, the USPS can only raise rates 5¢ above inflation and they must wait at least a year between rate increases. This law was intended to prevent the Postal Service from raising rates too frequently and they are required to gain approval from the Postal Regulatory Commission, which is underfunded and has limited staff.
Second, in order to have any chance of obtaining approval for a rate increase, the Postal Service must first reduce service or increase prices by an amount that would cover their costs. This is one of the factors at play in why they are reducing services like hours of operations. They need to maintain their revenues while cutting costs so they can show that they have exhausted all other options before increasing rates.
Third, the Postal Service must prove that they will be able to cover their fixed costs (virtually unchanged from last year) while also covering their costs which are increasing by 8-10%. If they don’t show that they can do this, how can they show that they need to raise rates so high?
Finally, the Postal Service is already in a deficit situation and even if the rate increase puts them into a surplus situation for one year, it may not accomplish what is intended because there is no guarantee that Congress won’t cut their funding next year. For example, back in 2006 Congress mandated an increase in postal rates of 10.5% over 2 years. They had to pass legislation allowing for this and the Postal Service got all of the authorization that they needed to raise rates. The first year the rates went up by 10.5%, which at the time was above inflation and Congress approved it. The following year Congress reduced their rate increase to 5% from last year’s rate of 5.8%, but the Postal Service still ended up in a deficit, $40 million dollars worse than expected, despite raising prices by only 1% over inflation and covering costs by cutting service hours by 22%. This experience caused Congress to be much more cautious when authorizing future rate increases. Since 2006, every effort to approve a rate increase has been blocked in committee with no bill making it out of committee.
Conclusion
The USPS is stuck in a hard place. They can’t raise prices without cutting services, and they can’t cut services without raising prices. They can’t just roll over and die either, which is an option that Congress would love to see happen. Congress seems to prefer a managed bankruptcy for the Postal Service, but the biggest obstacle to that plan is getting the Postal Service to agree.
The biggest problem for the Postal Service isn’t their finances, it is their failure to understand how much people rely on them or appreciate them.