It apparently pays to scrub those pension funds.

According to administration insiders, jaws dropped at the Treasury Department, Office of Management and Budget and the U.S. Postal Service when a review team led by the Office of Personnel Management discovered that the Postal Service has been overpaying, by billions of dollars, into an employee retirement fund.

Officials announced this week that the OPM review team found the statutory formula that sets the rate for pension payments was out of whack, in part because of higher-than-anticipated yields on pension investments.

As a result, Postmaster General John E. Potter said, the post office can save $2.9 billion in fiscal 2003 and about $2.6 billion each subsequent year if Congress agrees to change the pension formula.

If the pension payments are scaled back, Potter said the post office would not need to increase the price of stamps until 2006. While happy to get a financial break, Potter also stressed that the Postal Service would continue to cut costs, consolidate mail handling plants and urge Congress to permit more flexibility in the processing and pricing of mail.

"A lot of credit goes to OPM Director Kay Coles James and OMB Director Mitch Daniels and their staffs," Potter said. "Both understand the long-term financial challenge the Postal Service faces and approach the issue of postal retirement liabilities with a fresh perspective and open mind as part of our transformation plan activities."

The review of postal pension funding began several months ago, after the Senate Governmental Affairs Committee asked the General Accounting Office to audit the finances and liabilities of the Postal Service. In so doing, GAO asked OPM to look at the post office's payments to the Civil Service Retirement System.

OPM found the Postal Service has paid $152.1 billion into CSRS to cover annuities for postal workers and is due to pay $91.5 billion more in future payments, under the statutory formula.

That figure, it turns out, is $71 billion higher than the amount needed to cover the cost of future postal retirements, officials said.

For the Postal Service to reduce its future payments to CSRS, Congress would have to change the post office's financing formula, which includes 30-year and 15-year amortization schedules aimed at covering retirement costs linked to postal employee pay raises and cost-of-living adjustments. Bush officials plan to ask Congress to let the Postal Service reduce its annual payments and spread out any unfunded liability to the retirement fund over 40 years.

The new financial analysis will not change current postal employee retirement contributions or affect future benefits, officials said. It will only affect what the Postal Service itself pays into the fund.

When OPM reported its findings, key budget officials were surprised, officials said. Treasury and OMB crunched the OPM analysis to recheck the finding. After all, a statutory change would result in the loss of a multibillion-dollar cash stream at a time when the White House and Congress face budget deficits.

"What happens budget-wise?" a Senate committee aide asked. "Do you need something to offset the change? There is going to be a further deficit to the budget."

Vince Giuliano, senior vice president at Advo, a direct marketing services company, said a mailing industry task force pointed out in a report last year that pension payments and interest charges are a root cause of the post office's financial difficulties.

"I don't think they understood it," Giuliano said, referring to the pension formulas. "I think it is one of those items that has been taken for granted over these years, because it was a part of legislation. The prescribed payments are in law; the interest payments are in law."

Giuliano called the discovery of the overpayments "most gratifying. I think it shows a success story for Washington."

Talk Shows Norm Lorentz, chief technology officer at the Office of Management and Budget, will be the guest on "The Business of Government Hour" at 8 a.m. tomorrow on WJFK radio (106.7 FM).

"Employees and the Federal Agenda" will be the topic of discussion on the Imagene B. Stewart call-in program at 8 a.m. Sunday on WOL radio (1450 AM).

Stephen Barr's e-mail address is barrs@washpost.com.