Inspector general David Williams says cash-strapped service, saddled with debt and low revenues, is in 'very serious trouble'

The chief postal watchdog has warned that the troubled US Postal Service will go out of business this year unless Congress acts to rescue it.

David Williams, the inspector general of the USPS, says the service is in "very serious trouble", after five years lumbered with heavy debt and falling revenues.

In an interview with the Guardian, Williams warns that Congress, which has been distracted by November's elections and the fiscal cliff crisis, must act this year to save the service.

The USPS lost over $16bn last year, and has lost about $41bn over the past five years, according to Robert Taub, a vice-chairman of the Postal Regulatory Commission.

Since 2006, the postal service has been required – unlike any federal agency – to pre-fund its retirement and healthcare benefits to workers. This costs it about $5.5bn a year. Currently, the post office has paid in $330bn for benefits, but the Office of Personnel Management recently told Williams that it will need $394bn to satisfy the legal requirement.

At the same time, it has been unable to raise postal rates enough, because they are pegged to inflation, and inflation is low. (A long-awaited rise is coming on January 27, moving postal rates up by 2.75%).

The economic downturn in 2007 hit the postal service hard, as people sent less mail; it has also seen a steep decline in its most profitable product, first-class mail.

Richard Geddes, an assistant policy professor at Cornell and an American Enterprise Institute scholar who has studied the postal service, says first class mail has fallen from 103bn pieces in 2000 to just around 74bn pieces in 2011.

Even though it has shrunk from nearly 900,000 thousand employees in 1998 to about 530,000 now, many regulators and lawmakers see the US Postal Service's infrastructure as inefficient, and have talked about areas they would like to cut – the number of facilities that the USPS uses to process mail, for instance.

Williams, whose organisation audits the USPS, described the set of financial constraints on the service as "murder – it wasn't premeditated, but it was murder."

The postal service has reached its $15bn credit limit with the US Treasury, and has in effect run out of money."This is the year that they borrowed so much that they can't borrow any more," Williams said.

Asked whether the USPS will need a bailout this year, Williams replied: "Yes. The choices are that it would cease to exist or it would need a bailout." Williams said he did not expect the USPS to require taxpayer dollars, but instead that it would require congressional intervention, perhaps to reduce the pension payments.

The US Postal Service, which missed its last two payments into the benefit funds, has never made a single payment without having to borrow from the US Treasury. Ruth Goldway, chairman of the Postal Regulatory Commission, notes the irony: the USPS pension payment goes to the US Treasury, so for the past five years it has been borrowing from the Treasury to pay the Treasury.

There are many possible solutions to the problem, but, as a start, Williams, Goldway and Taub believe that the pension payments should be reduced. "I favor a post office that is not burdened by this unrealistic pension obligation," Goldway said.

Goldway says the main reason for the dire financial state of the USPS is the debt it took on to meet its pension payments. "They wouldn't be in the situation they're in without having borrowed all this money," she said.

California congressman Darrell Issa, a Republican who has taken the lead on postal service reform along with congressman Dennis Ross, suggested last year that USPS employees should be required to pay into their health and life insurance benefits, like all federal workers.

Another school of thought holds that the postal service could shrink further, cutting staff and facilities. Williams suggests that if the post office took steps to reduce its size that it could save $12bn a year: "Which is more than enough to get them out of the trouble they're in."