The Forever Stamp

The Postal Service has proposed the "forever stamp" as a means of hedging against future price increases:

Post Office Hopes Idea Of 'Forever Stamp' Sticks, by Christopher Lee, Washington Post: ...After increasing rates 13 times in 32 years, the U.S. Postal Service proposed a way yesterday for consumers to lock in the price of a first-class stamp, which officials want to raise by 3 cents, to 42 cents, next year.

Postal officials pitched the idea of creating a "forever stamp" that would be good for sending first-class mail no matter how much -- or how often -- the cost of a postage stamp goes up. ... The forever stamp, which would cost the same as a first-class stamp, would provide a hedge against future postal rate increases and end the search for 2- or 3-cent stamps that usually follows a price increase. The stamps could pose unusual challenges for the Postal Service, however, and officials say many details still have to be worked out. ...

Consumers could squirrel away forever stamps for months or years; they essentially would gain value every time rates increase. ... "If you buy it, it can be used forever on single-piece first-class letters," said Stephen Kearney, vice president for pricing at the Postal Service. "A lot of other shipping companies raise their prices every year, and we are actually committed to moving to a one-year rate-change cycle," he said. "That's part of what motivates the idea of the forever stamp -- to make that impact not affect consumers as much."...

The idea is popular, even among the Postal Service's critics. "A lot of people will be placing their bets on these stamps," said Pete Sepp, a spokesman for the National Taxpayers Union... "Given the prospect of endless Postal Service . . . rate increases down the road, I imagine they will run out of forever stamps. They won't be able to print those stamps fast enough." ...

Forever stamps may pose a few challenges to the Postal Service. For one thing, strong early sales of the stamps could lead to sagging revenue down the road, especially if consumers buy the stamps in large numbers to avoid higher postal rates in later years. And then there is the question of why anyone would ever buy a regular first-class stamp again if it costs the same as a forever stamp but its value could never grow.

"Until we flesh out the details, it's an open question," Kearney said in an interview. "We don't have the detailed proposal ready. Today we are committing to the concept and the principle of doing it. There will be more specifics about when and how the stamps will be made available."

It's not obvious that a consumer should buy the stamps as a hedge against future rate increases. Suppose, to make it easy, a stamp costs $1.00. Let the risk free interest rate be 5% and suppose you expect postal rates to increase by 3%. If you are going to need 1,000 stamps a year from now and buy them now for $1,000, you will get a return of 3% because the stamps would have cost $1,030 a year later.

But you could have invested the money at 5%, received $1,050 at the end of the year, purchased $1,030 in stamps, and ended up $20 ahead. So the decision depends upon a comparison between the market interest rate and the expected rate of appreciation in stamp prices. On this point, see the expert, Tom Bozzo, who notes the real price of stamps has been relatively flat so that the long-run real return to such an investment would have been low.

It's also not obvious that "strong early sales of the stamps could lead to sagging revenue down the road." Suppose the interest rate and the rate of increase in stamp prices are both 5%. If I buy 1,000 stamps today at $1.00, the Postal Service can invest the $1,000 at 5% and cash it out a year later for $1,050 just as I use the stamps. Thus, this is identical to my waiting a year and buying the stamps after the price has gone up by 5%. More generally the Postal Service could make or lose money, but only to the extent of the difference between the rate of return earned on the $1,000 and the rate of increase in stamp prices.

There are other aspects to consider, e.g. if you purchase a sheet of stamps but don't use them all before the next rate increase, then there are costs of acquiring small denomination stamps to make up the difference and forever stamps avoid that risk and thus lower expected costs. For me that benefit is relatively large, but this can be built into the rate of return from holding stamps. The point remains that whether to purchase the stamps or not as a hedge against future price increases depends upon a comparison of the market rate of return with the return on holding the stamps, all things considered.

Comments

says...

Mark
France has had 'forever' stamps, well forever. It works very well with none of the problems that the US Postal Service worry about.

[dcwatcher]

you forget about taxes. the 5% return on invested capital is likely to be fully taxable while the rise in the value of the stamps is not. after taxes your example is close to break even.

[Tom Bozzo]

A forward-looking factor affecting the investment value of 'forever' stamps is that pending regulatory reform legislation would subject the Postal Service's non-competitive products (a la First-Class Mail) to a CPI-based price cap. An interesting question is how frequently prices actually would adjust under a price cap regime. I could imagine the 'forever' stamp taking over from the U.S. flag definitive stamp as the most popular form of retail postage w/o leading to material changes in stamp purchasing patterns otherwise. (I should note that I have no involvement with the project.)

[pgl]

TB is right about the relative price of stamps over time. I may have graphed this around the time the nominal price was increased to $0.39. One thought - which I have not yet modeled out: could there be some option pricing explanation where high inflation uncertaintity might explain a small premium? Then again, I doubt a realistic estimate of inflation uncertaintity could justify a $.03 premium.

[Alejandro]

People buy large amounts of stamps to avoid transaction costs (going to the postal store every time you want to mail a letter). Forever stamps are not ment to provide insurance against stamp inflation. When stamp prices go up I'm upset not because now I have to pay $0.02 per letter. I'm upset because I have to go to the postal store to buy $0.20 of $0.01 stamps. I probably spend more on gas driving to the postal office than on the extra stamps I need. I would even pay 40 cents for forever stamps when the price today of first class mail is 39 cents.

[James Hamilton]

Each time they raise the price, the Post Office seems to initially catch themselves by surprise, so they don't have "37 cent" stamps to sell, but instead something marked "C" or "first class". Then I have trouble, if it's been sitting around in a drawer for a few years, remembering just how much a "C" stamp is supposed to be worth. So, I'd be grateful for a real-valued stamp not as an inflation hedge but as a subsidy to disorganized households with limited memories (like mine).

I've also wondered-- does the Post Office remember just how much a "C" stamp is worth, either? If you send a letter using one with no 2-cent supplement (or whatever it takes), would it be marked for postage due?

[Tim]

This should have been done a long time ago the argument that future revenues could suffer is pretty silly. I don't think anyone is going to use regular postage stamps as an investment strategy. Its a no brainier, and forever stamps should replace all regular priced stamps.

[save_the_rustbelt]

Why reform and modernize the USPS when you do something really stupid like a forever stamp?

[Michael]

The USPS is undergoing reform and modernization. Not to mention, The Postal Service is a massive organization with a tremendous amount of cost. Undeliverable mail cost The Postal Service $1 billion per year, and they are in the process of updating their network to improve efficiency and introduce tracking (this means you won't be able to say the check's in the mail for much longer). For businesses that send bulk mail they offer work sharing in exchange for lower postage rates. Alot of cheap tools are available to businesses to keep postage costs down like ZIP+4, CASS, DPV, aned NCOA.

[save_the_rustbelt]

"The USPS is undergoing reform and modernization."

Yes, they are now about to the 1980s.

A good place to start would be to end Saturday deliveries, we could live without it.

We had a great mailman who recently retired at the age of 54. During his last years on the job he had 7 weeks paid vacation plus sick time plus holidays plus personal days plus.... you get the point.

[cm]

Not my problem. I still have a few .32 stamps lying around that I inherited from somebody, and 1+ booklet of .33's that I purchased when I came to this country. When they now raise to .42, I can use .10 upgrades without feeling like I'm leaving money on the table (yeah right). The thing is that the convenience of the .10 upgrade will not last long enough, and I expect to send only 1-2 standard rate letters over the year.

Viewed from another angle, the annualized letter rate "inflation" since the 90's has been around 2.8%. The admittedly few data points of the .39 and the proposed .42 hike indicate it may have accelerated. Not surprising.

[David Andrew Taylor]

So what you're telling me is that I can buy a book of these stamps and earn basically 8% a year return on investment? That's about the cost increase that we've been seeing form the Post Office from $.39 to $.42, or $.03 per stamp (at 7.7% increase).

[Tom Bozzo]

James: Since the Postal Rate Commission could, in principle, recommend a different rate than that requested, the Postal Service doesn't print denominated stamps in the new rates in advance. Hence the transition stamps. (I don't know if the PRC has actually recommended a different First-Class first ounce rate recently; the second-ounce rate request had been modified in at least one recent case I can remember.) A point of trivia is that the letters correspond to rate cases -- and, for that matter, you can go back and look up the value of any of the non-denominated "First-Class" stamp designs -- so it's theoretically possible to identify shortpaid pieces. The probability that a piece bearing only an older non-denominated stamp would be flagged as postage due would depend a lot on the sort of piece it was used to mail.

PGL: The 3 cent First-Class rate increase is substantially unrelated to the 'forever' stamp proposal. The details of the 'forever' proposal are as yet unclear, but my understanding from a document filed with the rate case is that there would be no 'forever' stamp premium (here). It should be noted that the previous two cent increase (to 39 cents) was part of an across-the-board rate increase to fund a congressionally-mandated escrow payment the disposition of which promises to make the conference over the postal reform legislation interesting.

[Richard]

What a simple and straightforward idea. It should reduce the sporadic transaction costs for both the consumer and the provider.

I doubt that there would be much hording, and postage is already (very slightly) subsidized by hobbyists. If there is hording on a substantial scale it should be detectable, and an investment in either TIPS or short-term notes should succeed in recovering the deferred costs.

[cm]

Tom Bozzo: "The probability that a piece bearing only an older non-denominated stamp would be flagged as postage due would depend a lot on the sort of piece it was used to mail."

While I'm unable to figure out what this is supposed to mean, I have some background in postal automation, but the technology to weigh letters in real time while zipping through a sorting machine at 11+ ft/sec has been existing for years (not sure about production use), and technology to reliably identify postage (including which specific kinds of stamps are used), certain service classes, and measure the dimensions of mail in the same environment is in production use at a good number of postal services worldwide.

I'm not aware of automated handling of mail detected as underpaid, but it has been considered, and not pursued mainly because of legal concerns (false positives). With existing technology it should be definitely feasible to extract suspected underpaid mail from the processed stream for manual inspection/adjudication.

[Cyrille]

That some of you would even consider using standard stamps as an investment might go a long way towards explaining why we sometimes have great difficulties understanding each other.

Meanwhile, I'll just keep going about with my one set of forever stamps, always in my wallet, getting a new one from the machine at the post office across the street everytime I run out, never having to queue up for that again, and certainly not worrying about the economic rationality of my 5€ purchase.

France can be such a sweet uncomplicated place sometimes ;-)

[Tom Bozzo]

CM: The advanced facer/canceler (for people w/o postal automation knowledge, that's the USPS machine that orients and cancels letter-sized collection mail) faces the mail by detecting the stamp location. I'm pretty sure it kicks out pieces for which it doesn't detect any stamp. I don't think it reads the postage and/or rates the pieces as they go through the machine.

So, basically, I'm saying that postage due accounting is dependent (in part) on clerks and carriers spotting shortpaid pieces, so letters processed on automation would be relatively less likely to be inspected. (Though I don't claim any special expertise in USPS revenue protection, beyond my understanding of how the machines work, so take that with the appropriate grain of salt.)

[cm]

Tom Bozzo: "Old generation" facer/cancelers rely on fluorescence in UV light to detect the stamp location. Most stamps are printed on uniformly fluorescent paper, but I have seen "coded" stamps where fluorescence patterns differ with postage or service class.

Fluorescent paper has problems with dark motives, as the dark print obscures the fluorescent reflection, and some postal services have stopped using it altogether because of environmental concerns as the fluorescent agent is toxic.

Newer configurations use color/bw imaging to detect and recognize stamps and other indicia marks instead or in addition to fluorescence. Those will actually identify the specific kind(s) of stamp on the envelope, and the sort plan can be configured to pull out by (suspected) underpostage.

I don't know to what degree of sophistication postal services actually go in everyday production runs these days, nor what is installed in USPS facilities.

[cm]

I don't want to detail how common stamp frauds work, but at least before the Internet quite a bit of stuff has been going on there. Many of the more serious commercial frauds have involved illicit use of meter marks, which is one reason for the push to "individualized" matrix codes.

[Tom Bozzo]

cm: Next time I'm in a plant, I'll have to check out the facer/canceler rejects and see what it's kicking out.

[Adam Nash]

I wrote a quick, tongue-in-cheek post on this same topic.

The New Inflation Protected Security: The 42¢ Forever Stamp

It's an interesting idea to think about... inflation-protected gift certificates.

[Charles Tse]

The article uses an example of a 5% real interest rate and 3% increase in postage, and suggested that it is not a good idea to buy the stamp in advance because you could've used the interest income to buy the stamps at increased value and still have excess. It has two main flaws:

1. Taxes. Your 5% interest income is taxed.
2. You don't buy a bulk load of forever stamp a year or two years in advance. You buy them right before the next price hike. That way, you could be making that 3% in a {day, week, month} (depends on how far in advance you buy).

Now redo the math ;-)

[MikeK.]

All this planning for hedging against inflation, etc. is nice until your 4 year old daughter decides to use the Forever stamps as "stickers".

I'm not sure if the Forever stamp will really work because we are not thinking through the problem completely. The 42 cent raise is well understood with. However, what happens with the NEXT raise to lets say 45 cents? That is when there will be a mad dash to the postal office to clean out the forever stamps for 42 cents. I guess they will then have to conduct 'surprise' raises to not cause mass raids to the postal office.

[NoelE]

Charles makes two good points identifying flaws in the previous arguments, but I believe there are further flaws in his points as well. The point that is being overlooked is that there are two different ways to realize the "gain" on your investment of stamps. The first is to use the stamps as postage, thus paying less than the going rate. The second is to sell your stamps to someone else, who will in turn, either use them or keep them as an investment. With that distinction in mind, let's revisit the two points brought up by Charles:

1) "Your 5% interest income is taxed." Yes, but I would first argue that you could not possibly use (as postage) $1000 worth of stamps in a year as an average postal service consumer, and even if you could, that would only be a lot of effort for a lousy $50 gain. Bulk mailers have different rates and the postage is (usually) applied automatically, either by printing or by machine, and it's not clear whether or not this same approach (forever stamps) will be implemented for bulk rates too.
So that leaves the other option, selling your stamps for a profit. In this case you are still obligated to pay taxes on your gains! Though admittedly it would be easier to cheat on a private sale than on gains from other investments.

2) "You buy them right before the next price hike." Again, I would argue that you would have a difficult time using up $1000 (let alone more, to actually make a significant return on your investment) in a year. Combined, my wife and I spent at most about $100 on stamps in a year (though probably as little as $50), so assuming the same 5% risk-free interest rate, and that it takes 10 years to spend $1000 worth of stamps, the comparison is not between $1050 and $1030, but between $1629 and $1344 (I assumed an average annual postage increase of 3%). Now even considering 15% capital gains tax doesn't even the match.
That still leaves the other option of buying them one day before the price hike and selling them one day later (for an astonishing 3% daily return on investment). You would find it extremely difficult to find anyone willing to pay the going rate for postage for your stamps. Other investors wouldn't buy any because they bought all theirs the day before at the lower price. Individual postal consumers won't pay the going rate because it is much more effort to seek you out (let alone costly, if you have to ship them, say, from ebay!) than to just go to the post office where there is (from their perspectives) an unlimited supply of stamps at the going rate. So as a result, the price of "forever stamps" from third parties will be lower than the current postage rate, eating (to the point of totality, most likely) into your 3% return.

In short, postage stamps will not be profitable in the quantities necessary for them to be a viable investment vehicle. (In my opinion, of course.)

[Greg T]

The example was a bit simplified. An average business would use 8% MRR, so a tax of 62.5% of the return would bring it equal to 3%.

As for an average postal customer, buying a bunch of forevers before the next postage hike is like stocking up on gas before the next gas hike. If they want to do it, no biggie.

[ForeverStamps]

Are Forever Stamps a distraction to the fact that the public is subsidizing bulk (junk) mail? New federal law will allow for annual increases in the cost of mailing a first class letter. Bulk (junk) mailers spend as little as 12.7 cents per piece of mail. They have only seen their rates increase 61 percent since 1975, while the new rate increase to 41 cents represents a 223 percent increase to the general public over the same time period.

[Jennifer]

While the idea seems simple and straightforward, I feel it is a poor one. The average American cannot afford to invest $1000 or several thousand in stamps to insure themselves against future increase, only the wealthy will be able to do so. Therefore, like in most ways, only the wealthy will benefit. It's appauling!

[cheryl]

i don't mind paying for the service when you get the assistance you're paying for, we have had mail come from california and may take 3weeks to get here and when it is registered it is even more ignorant, the post office said you may have addressed it wrong, wrong address, (on a certified and then 2 months they still don't have any information on the location or return). we are put off and told to call number after number with no response to receiving mail in a timely manner and treated like we are NOBODY.

[Ken K.]

A "Forever" stamp should survive a currency crisis or collapse more like a gold coin than a dollar. In this sense, it preserves wealth rather than earns more of it.
But I do wonder if the federal government would confiscate or void "Forever" stamps should such a currency crisis take place. Remember gold in 1933?

[hmmm]

why would anyone buy forever stamps as a hedge against inflation. They are at best going to give an inflation + 0% return. TIPS pay inflation + 2.7%. That ignores the fact that postage rates have gone up slower than the CPI.

The only stupid thing would be to NOT do it.

[Tom In sulnnyvale]

the future value computation forgets to include the income tax that the interest rate might incure. If I subtract my state and federal income tax on the additional interest income earned I no longer end up $20 ahead. Worse today I had to go and purchase some two cent stamps to match up with my old first class stamps... A mile out of my way and forty min. of my time... for thirty stamps, sixty stamps....

First class mail is a bargin... and I like the idea of Forever Stamps!

says...

I would like to see the "forever stamp" sold in the 100 ROLL. Then I could continue to use my "convenient" stamp roll dispenser. I never have bought nor do I like the "books" which are not "really" books (with a cover) to protect the stamps.

[Megan]

Hah. My post man didn't even recognize the Forever stamp for it's "worth." My letter has been returned three times for additional postage, even after I clearly indicated which type of stamp it was. He left a little post-it note on it, too: "Forever stamp is worth 42c only. 1 oz rate."

What's the point of a "forever" stamp if they're not going to tell their employees what it's worth?