* Agency set to default on payment for retiree benefits
* Default would not cause service interruptions, USPS says
* Uncertainty seen accelerating some mailers' move to online
By Emily Stephenson
WASHINGTON, July 30 (Reuters) - The U.S. Postal Service is set this week to default on a giant payment, the latest blow illustrating Congress' slow progress toward fixing the agency's deep financial woes and one that could damage some customers' confidence.
The Postal Service has said for months that it could not afford to make the $5.5 billion payment for future retiree health benefits, which was originally due in 2011 but was delayed by Congress until Aug. 1.
The mail agency, which relies on sales of stamps and other products rather than taxpayer funds, has said the same about a second payment due at the end of the fiscal year in September.
Congress has so far made no significant push to delay the payment again. Missing the health pre-payment, the first default in the agency's history, would not cause interruptions in service or prevent the Postal Service from paying suppliers and employees, USPS spokesman David Partenheimer said in an email.
But trade groups, mailing industry lobbyists and some business owners said the approaching default raises questions about the Postal Service's financial stability and Congress's commitment to helping remedy the agency's money woes.
Eroding confidence in the Postal Service's future adds incentive for mailers to explore alternatives to traditional mail, they said - a shift that would only deepen the agency's troubles.
"Each one of these deadlines that gets hit and missed, I think, creates a degree of uncertainty in the minds of those who make decisions about how they're going to manage specific marketing campaigns," said Ken Garner, president of the Mailing and Fulfillment Service Association, a trade group representing mailers, printers and other mailing industry businesses.
"It just creates again this movement away from mail as a product," he said.
HOW WE GOT HERE
In 2006, Congress passed a requirement that the Postal Service set aside funds each year to use toward retiree health benefits years later, when the agency's spending on benefits was forecast to balloon.
As Americans have increasingly turned to online communication, the Postal Service has steadily lost money each year and has struggled to meet the annual, multi-billion-dollar retiree benefit payment obligations.
The agency lost $5.1 billion in fiscal year 2011.
"The need for comprehensive postal reform legislation has never been more urgent," USPS's Partenheimer said in an email. "Absent legislative change, we will be forced to default on two payments due this fiscal year to prefund retiree health benefits."
Lawmakers from both parties have said for more than a year that they planned to tackle legislation to overhaul the Postal Service and help return it to profitability, but the House of Representatives and the Senate do not appear close to a deal.
The Senate passed a bill in April that would spread the retiree health payments over more years, allow the Postal Service to end Saturday mail delivery, and let it use surplus funds in a retirement account to offer early retirement incentives as a way to reduce the workforce.
House leaders said last month they hoped to bring their own bill - which would keep the health pre-payments and create oversight groups to close facilities and cut costs - up for a vote before the summer recess. But a House vote has not been scheduled, and lawmakers leave at the end of this week until after the U.S. Labor Day holiday in early September.
"It's well past time for House leaders to follow through on past assurances to hold a vote on a postal reform bill," said Democratic Senator Tom Carper, one of the Senate bill's authors.
SHIFT TO ONLINE
Most members of the mailing community believe Congress will eventually pass postal legislation. But many said they worry that the longer that takes, the more likely a postal overhaul could involve painful changes in service - facility closings, delivery delays or rate increases.
Meanwhile, the uncertainty has spurred some businesses' efforts to look for ways to move transactions online, supplement direct mail communications with email and social networking, or branch out into new fields, industry insiders said.
"Those negative news stories are not unnoticed by major advertisers, by financial services companies, by other very, very large mailers who are looking at the months ahead in 2013 and thinking, 'How should I commit my media dollars?'" said Ben Cooper, of the Coalition for a 21st Century Postal Service, which represents the private sector mailing industry and some 8 million workers.
"These are not good signals to the market," he said.
The movement away from mail has already begun for some businesses. Banks including JPMorgan Chase and Bank of America have used the Postal Service's struggles to encourage customers to take advantage of online services such as electronic money transfer options.
Dave Lewis, vice president of marketing at ProList in Gaithersburg, Maryland, said many of the associations he works with have stopped sending cards in the mail to remind people to renew memberships. Instead, they are sending the reminders by email.
L.F. Miller, president of Catawba Print and Mail in Hickory, North Carolina, said his company is moving away from primarily making its money on mailing services into on-demand printing and other offerings.
To be sure, mailers, including many who worry about the future of the Postal Service, say the mail is still the best method of communication for many businesses. Emails can get caught in filters, and older Americans are not active on social networks. The Postal Service also works extensively with big mailers to keep them using the mail.
Don Jarred, vice president of production services for Aspen Marketing Services, said direct mail continues to be a major feature in clients' marketing plans.
And Neil Metviner, chief marketing officer at OSG Billing, said that while some of his customers have expanded into electronic billing for convenience, he did not see his business changing as a result of fear about the Postal Service.
Even so, some mailers are eyeing alternatives.
"I don't have faith in making money on the mailing side anymore," Miller said.