This week, the United States Postal Service unveiled its grand plan to raise revenues, close its budget deficit, and save the Post Office now and forever. It's going to ... raise stamp prices by 3 cents.
As grand plans go, this one is kind of underwhelming. Worse, it won't work. Not by a long shot -- and I'll tell you why.
The United States Postal Service just finished reporting a $740 million quarterly operating loss last month. As things currently stand, the USPS is on track to lose $6 billion this year. Yet by the Postmaster General's own admission, raising stamp prices by 3 cents will raise only about $2 billion in revenue. It won't come close to fixing the problem.
As a result, even if everything goes right with the USPS's plan, and even if the Postal Regulatory Commission approves the rate increase (as it must do, for any rate increase greater than the rate of inflation), the USPS's plan is doomed to fail. All the other options the USPS has proposed for closing the budget gap in recent months remain in play:
- Closing nearly 3,700 post offices across the nation (one of which is probably yours).
- Shuttering 250 mail processing facilities.
- Eliminating "one-day delivery" of first-class letters, thus doubling or tripling the length of transit.
- And, of course, ending Saturday mail delivery.
And even that won't solve the problem. By its own calculations, the USPS says that closing nearly 4,000 USPS facilities will cut its costs by only $6.5 billion per year. All other measures, combined, might save a few billion more. And yes, this might be enough if the $6 billion USPS expects to lose this year were the end of its problems, but most authorities who've looked at the problem agree: By 2015, the USPS will be losing $20 billion a year.
So what's the solution?
If you ask the USPS, the biggest problem it faces today is that Congress has required it to prepay its retirees' future health benefits, a bill that comes to $5.6 billion annually (and that comes due this month, by the way). Next month's required $1.4 billion workers' comp contribution doesn't help matters, either.
But really, viewed on the most basic level, the USPS's real problem is that it takes in $65 billion in revenue annually but incurs $85 billion in costs. Clearly, it needs to find more revenue. Just as clearly, adding 3 cents to the price of a postage stamp won't cut it.
Last time I looked at this problem, about a month ago, I estimated that closing the USPS's $20 billion budget gap would require raising the cost of first-class stamps (and postcards, and packages, and on and on) by 31% -- charging $0.60 for a stamp, in other words. Across the whole array of USPS products, that would be enough to raise $20 billion in needed revenue. But now we have a new wrinkle.
The USPS is saying that raising the price of a stamp by 3 cents, or 6.5%, will raise only $2 billion in revenue -- probably because demand for stamps will decline as the price of a stamp rises. Assuming the USPS's calculations are correct, therefore, it's actually going to require a 65% increase in the price of a stamp to close a $20 billion budget gap. Each stamp will need to cost $0.76 to solve the problem.
To which I say: Fine. Bring it on.
$0.76 for a postage stamp?! Ridiculous!
Now, before you break out the torches and pitchforks, let's consider here for a moment: What's the alternative to letting the USPS charge us $0.76 for a postage stamp?
We could abandon USPS entirely, and send all our letters (or, rather, the few letters we still send in the age of email, IM, and Skype) by FedEx or UPS. Of course, the cheapest rate FedEx will quote to send a letter cross-country is about $11, while UPS charges more than $12.
Or we could hop in the jalopy and truck our letters cross-country ourselves. (But have you checked the price of gas lately?)
Or, we could let the USPS keep limping along, cutting services and raising prices too-little-too-late until it finally goes bankrupt. (Cue FedEx and UPS again).
If you ask me, the USPS is still the best option, and the cheapest game in town, even at $0.76 a letter. I say we bite the bullet, tell Congress to authorize the rate increase now, and get it over with -- and save the USPS. But what do you think?
Sound off below.
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Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends FedEx and UPS. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.