Beginning in 2004, we had been required by P.L.108-18 to pay an additional annual amount into the CSRS retirement plan, if necessary, each September, as determined by OPM. The “supplemental liability” represented the excess of the actuarial present value of the future benefits liability over the actuarial present value of plan assets, future contributions, earnings, and other actuarial factors related to Postal Service participants in the CSRS plan. In 2006, we paid $257 million including interest towards this liability, of which $231 million was interest and the remaining $26 million a reduction in the principal amount of the liability.
P.L.109-435 relieved the Postal Service of the obligation to pay for the portion of the CSRS pension costs attributable to the military service of its retirees that was previously imposed by P.L.108-18. The cost of these benefits was estimated by OPM to be $27 billion in 2003. The elimination of the military service funding requirement dramatically impacted the funded status of the portion of the CSRS allocated to the Postal Service. OPM determined that, as a result of the changes imposed by P.L. 109-435, the Postal Service portion of the CSRS had a surplus of $17.1 billion as of September 30, 2006. Accordingly, the “supplemental liability” payment previously required by P.L. 108-18 was suspended and no amount was incurred or paid in 2008 or 2007.
The “supplemental liability” payments were suspended until 2017 by P.L. 109-435. At that time, OPM will perform an actuarial valuation and determine whether additional “supplemental liability” payments are necessary.
Note 11 — Workers’ compensation
We pay for workers’ compensation costs under a program administered by DOL. These costs, recorded as an operating expense, include employees’ medical expenses, compensation for wage loss, and DOL administrative fees. The program also provides for payment of benefits to dependents of employees who die from work-related injuries or diseases.
Our liability at September 30, 2008, represents the estimated present value of the total amount we expect to pay in the future for postal workers injured through the end of 2008. The estimated total cost of a claim is based upon the date of injury, pattern of historical payments, frequency and severity of the injuries, and the expected trend in future costs.
We estimated our total liability for future workers’ compensation costs to be $7,968 million at the end of 2008 and $7,771 million at the end of 2007. The payout period for this liability will, for some claimants currently on the rolls, be for the rest of their lives.
The liability is sensitive to changes in inflation and discount rates. An increase of 1% in the assumptions would decrease our estimate of the liability by approximately $732 million. A decrease of 1% would increase our estimate of the liability by approximately $871 million.
We implemented a revised actuarial model to calculate our workers’ compensation liability on September 30, 2008. The model’s methodology is similar to that used in the independent consulting firm actuarial valuation, which formed the basis for the recorded liability in 2007. The revised model explicitly projects the estimated cost to resolve the most recent 10 injury years. We continue to rely on an independent actuarial consulting firm to perform an actuarial valuation on injuries occurring more than 10 years in the past.
Our model estimates the liability for the most recent 10 years using the paid loss development method, two frequency/severity methods, and an expected unpaid method. The paid loss development method estimates the liability based on the historical pattern of payments observed over many years. The frequency/severity methods estimate the liability by considering not only the cost, but the number of claims payments over many years. The frequency/severity methods require that we make explicit assumptions about the future changes in the average payment amounts due to inflation or other cost increases. The expected unpaid method estimates the liability by giving weight to both the expected development from the paid loss development method and the estimated ultimate value from the frequency/severity method. For injuries occurring more than 10 years in the past, an estimate of the ultimate liability is prepared by an independent actuary and incorporated into the new model. All of the methods used in calculating the 2008 and 2007 workers’ compensation liability are generally accepted actuarial techniques and are each valid for estimating a liability such as ours.
We also annually review the inflation and discount rates used to determine the present value of estimated future workers’ compensation payments. Separate analyses of the appropriate inflation rates for the medical and compensation portions of the liability were performed, utilizing forecasts of medical inflation and inflation in the general economy, and forecasted rates of return on baskets of Treasury securities of varying durations. During 2007, we validated our assumptions and methodology with an independent actuarial firm. Our assumptions used to calculate the liability in 2008 and 2007 are projected returns on investments for compensation claims of 5.6% and wage inflation of 3.0%. For medical claims, we used 5.4% for returns on investments and 5.0% for medical future inflation for both 2008 and 2007.