De-moc-ra-cy  n [from Greek demokratia, rule of and by the people] 1:  relating to, appealing to, or available to the broad masses of the people 2:  the idea at the heart of the United States Postal Service's historic mission of universal service (see Radical).

Based on their date of employment, our career employees participate in one of the three retirement programs sponsored by the United States government’s Office of Personnel Management (OPM). Employees hired before January 1, 1984, are covered by the Civil Service Retirement System (CSRS). Participating employees contribute 7% of their basic pay to this fund. We match the 7% contribution.

Employees with prior government experience hired after December 31, 1983, and before January 1, 1987, are covered by the Dual CSRS/Social Security System (“Dual”). We contribute 7% of the employee’s basic pay; the employee contributes 0.8% of basic pay; and we and the employee contribute to Social Security at rates prescribed by law.

Employees hired after December 31, 1983, with the exception of Dual employees, are covered by the Federal Employees Retirement System (FERS), a retirement program that provides benefits from three different sources: Social Security, a basic FERS annuity and a voluntary thrift savings plan.

While all career employees may participate in the Thrift Savings Plan (TSP) as administered by the Federal Retirement Thrift Investment Board, the rules for participation are different for each group of employees. We do not match contributions by CSRS or Dual-covered employees to the TSP, and CSRS employee contributions are currently limited to 7% of basic pay. The contribution rate increases 1% per year for the next three years reaching a maximum contribution of 10%, subject to annual dollar limitations imposed by the Internal Revenue Code. We are required to make a contribution of 1% of basic pay to the TSP for FERS employees. In addition, we fully match FERS employee contributions up to 3%, and half of employee contributions between 3% and 5%. Employee contributions are currently limited to 12% for FERS employees. This rate increases 1% per year for the next three years reaching a maximum contribution of 15%, subject to annual dollar limitations imposed by the Internal Revenue Code. The table below outlines our contributions to the three retirement plans as required by law.

The CSRS combined 14% normal cost contribution (7% Postal Service, 7% employee) is based on “static” economic assumptions of 5% return on investments, no future salary increases and no cost of living adjustments (COLAs) for retirees. Notably, by law, our retirees’ COLAs are the same as all federal employees.

We are the only federal agency to provide full funding (principal and interest) for the retirement costs associated with general pay increases to CSRS employees and COLAs to CSRS retirees. As part of a multi-employer plan, the payments we make are not segregated for application to postal costs only. They are applied to total plan costs for all participants. We fund these deferred retirement liabilities over 30 years at 5% interest for active employees and 15 years at 5% interest for retirees. Our 2002 year-end payment to OPM, including interest, was $3.9 billion for our CSRS deferred retirement liability. We have no deferred retirement expense for FERS employees because FERS is funded so that all future costs, including retiree COLAs, are provided for from present contributions related to active employees. This is referred to as “dynamic funding.”

In accordance with FAS Statement No. 87, Employers’ Accounting for Pension Costs, an employer participating in a multi-employer plan recognizes as net pension cost the required contribution of the period. Any contributions due and unpaid are recognized as a liability. By law, we are responsible to fund the additional estimated increased liability cost to the Civil Service Retiree Disability Fund (CSRDF) created from our employee raises and retiree COLAs. This additional cost is set by OPM at the effective date of the raises or COLAs. OPM notifies us of the amount and bills us for the fixed and determinable amount. This creates a liability layer.

At the time the liability is fixed by OPM, we recognize the obligation as a liability. We defer recognition of the liability as an expense until the period in which the obligation is payable to OPM. The deferred liability, and the related deferred asset, recorded on our balance sheets was $32 billion as of September 30, 2002 and 2001. These balances will moderate and decrease over the next several years as the number of CSRS employees decreases and old liability layers are liquidated.

From postal reorganization in 1971 through the end of 2002, we have made cash payments totaling $55 billion on CSRS retirement liabilities associated with pay increases and retiree COLAs. Current postage rates include approximately $4 billion per year for payment of these costs, providing adequate funds on an ongoing basis to fully liquidate the current and future CSRS deferred retirement liabilities.

Our total retirement expense in 2002 was $9.1 billion, an increase of $220 million or 2.5% compared to 2001. This follows increases of $356 million in 2001 and $428 million in 2000. Over $112 million of this year’s increase is related to a combination of an increase in the number of FERS employees and an increase in basic pay. Approximately $66 million of this year’s increase was due to the COLAs for retirees, reflecting both an increase in their benefits based on increases in the Consumer Price Index and in the number of retirees eligible for the COLAs.

(See Note 6 of the Notes to Financial Statements for additional details.)