As a savvy consumer and longtime observer of the retail shipping industry, I‘ve watched with concern as the U.S. Postal Service has dramatically raised prices in recent years. USPS rate hikes have become an annual event – one that‘s putting an ever-larger dent in Americans‘ pocketbooks. Since 2000, a first-class stamp has leaped from 33 cents to 60 cents, while the cost of sending a Priority Mail package has nearly doubled. What factors are driving the agency to raise prices so aggressively, and what do the increases mean for consumers? Let‘s dive in.
USPS Faces a Mounting Fiscal Crisis
The most important thing to understand about the Postal Service‘s pricing is that the agency is hemorrhaging money at an alarming rate due to a toxic combination of shrinking mail volumes and rigid cost structures.
In fiscal year 2021, USPS booked a staggering $4.9 billion net loss on $77 billion in total revenue, marking its 15th straight year in the red. The agency hasn‘t turned a profit since 2006, with cumulative losses now topping $90 billion. And things are only getting worse: USPS lost another $3 billion in Q1 FY2023 alone as inflation drove up costs. Mail volumes, meanwhile, continue to evaporate:
| Year | First-Class Mail Volume (pieces) | Total Mail Volume (pieces) |
|---|---|---|
| 2000 | 103.7 billion | 207.9 billion |
| 2010 | 78.2 billion | 170.6 billion |
| 2021 | 50.7 billion | 128.9 billion |
Source: USPS Revenue, Piece, and Weight Reports
First-class mail, the Postal Service‘s most profitable product, has cratered by more than 50% since 2000 thanks to the rise of digital communications. Yet the agency‘s sprawling infrastructure, built to handle those higher volumes, remains largely intact despite multiple rounds of consolidation. The upshot is that USPS is now saddled with enormous excess capacity that‘s hugely expensive to maintain relative to its shrinking mail business.
The Universal Service Mandate Drives Up Costs
For consumers, one key reason USPS prices seem so high is that they include the cost of subsidizing the agency‘s universal service obligation. By law, USPS must deliver to every U.S. address 6 days per week and charge the same price whether you‘re sending a letter down the block or to a remote Alaskan village. In 2021, USPS delivered to over 163 million homes and businesses across 31,000 ZIP codes.
This mandate is a massive competitive disadvantage relative to private rivals like FedEx and UPS, who are free to set prices and service levels based on profitability. A 2008 Postal Service study estimated that the universal service obligation alone imposes $4.4 billion per year in extra costs. In other words, every American effectively pays a hidden surcharge on postage to ensure equitable access to mail service.
Compared to other posts, USPS‘s universal service burden is unusually onerous. An analysis by the Postal Regulatory Commission found that among 31 developed countries, 16 posts are not required to deliver nationwide and 11 are permitted to charge distance-based prices. The study concluded that USPS‘s model "is the most exposed to financial risk from declining mail volume" due to its inflexible mandate.
Retiree Costs Are a Massive Burden
The Postal Service‘s dire financial straits have been greatly exacerbated by a legal requirement to pre-fund retiree health benefits 75 years into the future. The mandate, imposed by Congress in the 2006 Postal Accountability and Enhancement Act, costs USPS around $5 billion per year and is a burden virtually no other entity faces.
Between 2007 and 2021, USPS was forced to divert over $50 billion in cash to the retiree fund instead of investing those resources in its operations. The agency has defaulted on many of the required payments, with its retiree liabilities ballooning to $120 billion and accounting for 74% of total debts as of 2021.
"The onerous pre-funding requirement has deprived the Postal Service of the resources it needs to invest in its future," argued late Congressman Elijah Cummings, a vocal critic of the mandate. "USPS has been forced to cut back on services and raise rates to make up for these artificial costs."
While Congress belatedly repealed the pre-funding rule in 2022, freeing up some $107 billion in past obligations, USPS still faces massive retiree costs going forward. Postmaster General Louis DeJoy projects the agency will need to pay $52 billion in retiree health and pension benefits over the next decade – a huge drain on cash flow.
Prices Are Still Cheap – For Now
For all the understandable frustration over higher stamp costs, USPS remains a tremendous bargain compared to private carriers for many shipments. Sending a 1 lb. package coast-to-coast via Priority Mail retails for $9.90 with USPS, versus $17.15 with UPS Ground and $23.00 with FedEx Home Delivery. USPS also offers unique cost-saving features like flat rate boxes, free package pickup, and standardized pricing without secret fees.
"USPS is almost always going to be the cheapest option for lightweight parcels, and its priority mail service provides excellent value," advises Krish Iyer, director of strategic partnerships at ShipStation. "The postal service doesn‘t tack on any fuel surcharges, residential fees, or Saturday delivery charges, keeping its pricing simple and predictable."
Yet USPS‘s low rates have contributed to its financial woes, and the agency is now aggressively moving to narrow the gap. In 2021, DeJoy unveiled a 10-year restructuring plan dubbed "Delivering for America" that calls for $44 billion in price hikes over the next decade – a 28% jump. The plan has already spurred multiple record price increases, and more are on the way.
The risk for the agency is that major rate hikes could backfire by driving away customers and mail volume. "USPS is already on the higher end among its international peers," notes Paul Steidler, senior fellow at the Lexington Institute. "There‘s a danger that continuing to raise prices well above inflation could make the service less accessible and push more people to cut back on mail."
The Bottom Line: A Failing Business Model
The inescapable reality is that the Postal Service‘s current business model is broken. The agency has lost nearly half its mail volume in the past two decades as demand shifts online, yet it remains saddled with legacy costs, excess capacity, and inflexible service mandates from an analog era. Political factors have made streamlining operations difficult and left USPS without the taxpayer subsidies that many foreign posts enjoy.
Management‘s solution is an aggressive plan to boost revenue via price increases and package growth. But many experts are skeptical that simply raising rates will be enough to stabilize the agency‘s finances long-term absent more transformational reforms.
"DeJoy‘s plan is a band-aid – it doesn‘t fundamentally fix the structural problems dragging USPS underwater," argues Representative Carolyn Maloney, chair of the House committee overseeing USPS. "Squeezing captive users with endless price hikes in a futile effort to fund an obsolete, oversized network is not a recipe for long-term sustainability."
For consumers and businesses, the upshot is that, like it or not, sending mail is probably going to keep getting pricier for the foreseeable future until Congress charts a different course for the Postal Service. As USPS‘s cost pressures intensify and private carriers also hike rates, finding creative ways to minimize shipping expenses will be more important than ever. That may mean anything from exploring alternative providers to redesigning packaging to be more compact and lightweight. What‘s clear is that the days of dirt-cheap postage aren‘t coming back.
