Instead of raising stamp rates, the USPS should cut costs

On Jan. 8, stamp prices will climb 5.4 percent. Next week, the cost of mailing a single letter will be 39 cents.

As if that weren't enough, postal analysts are predicting that the United States Postal Service will request an even bigger rate increase sometime later this year.

The Postal Service has been pushing Congress for greater pricing "flexibility," which it says would allow it to respond more quickly to the market and thereby increase earnings - using them, one hopes, to stave off price hikes.

In fact, however, the USPS already has substantial pricing freedom. The gentle brake of the Postal Rate Commission, which oversees and approves rate changes, has not prevented the USPS from steadily increasing prices since the 1970 Postal Reorganization Act.

Instead of clamoring for more flexibility to raise rates, the Postal Service should be looking for ways to cut costs. As the report of the president's commission on the USPS noted, rate increases should be "the last line of defense against rising costs rather than the first."

To be sure, Postmaster General John Potter deserves credit. He has reduced the USPS workforce by 10 percent through voluntary retirements since assuming office in 2001. He has also led the way on outsourcing, in particular extending "work share" discounts to big mailers who presort their own letters.

Through measures like these, Mr. Potter has been able to keep the USPS in the black despite a continuing decline in First Class mail volume.

Nevertheless, the USPS needs to cut costs further if it is to face down more than $70 billion in unfunded liabilities, money it has promised to future retirees but has no way to pay. Here are some steps it should take:

1. Adjust pay to incorporate geographical differences in cost of living. You don't need $65,000 a year in rural Missouri to support the same lifestyle as your $65,000-a-year colleague in Manhattan. If the Postal Service adopted a pay scale that reflected regional cost-of-living differences, it could save billions of dollars.

2. Expand work-sharing discounts. Worksharing, in which big mailers presort their own outgoing mail, has been a boon to the Postal Service. In 2004, such discounts resulted in $11 billion in savings to the US economy. More work sharing would mean more savings, for both the USPS and its customers (so long as discounts don't exceed savings).

3. Allow local postmasters to outsource delivery service. In a few places, such as Palm Beach County, Fla., delivery routes have already been turned over to the private sector. Contracting mail delivery can cost half as much as using federal postal employees on the same routes.

4. Expand the use of contract postal units. Through contract postal units, or CPUs, the Postal Service contracts an existing business, such as a drug store, to sell postal services. Some 5,000 CPUs already exist. Requiring virtually no investment in infrastructure, they offer a low-cost way for the USPS to meet demand.

5. Gradually reduce the wage premium for new hires. Taking salaries and benefits into account, postal workers earn substantially more than their private-sector counterparts. The postal service should start gradually reducing the premium offered to new postal hires, who receive, on average, a 28.4 percent increase from their previous jobs. It's important to note that under such a plan, current employees would not experience a benefit cut.

6. Stop signing no-layoff contracts with unions. As of February 2003, 89 percent of USPS career union employees were protected by no-layoff guarantees. No organization can effectively control costs if it is barred from adjusting the size of its workforce.

Serious cost-cutting measures like these are the only way to save the Postal Service's monopoly-market customers from further rate hikes.

Just as important, cost-cutting could save the Postal Service from extinction. In addition to its unfunded liabilities, the USPS faces such challenges as spiking gas prices and the long-term shift from snail mail to e-mail.

As management guru W. Edwards Deming famously said, "It is not necessary to change. Survival is not mandatory." If the Postal Service wants to survive, it must cut costs.

Sam Ryan is a senior fellow at the Lexington Institute, a think tank based in Arlington, Va.

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