Study lays out problems with the current unemployment insurance system, offers solutions

by CORY EUCALITTO | October 24, 2011

Few government programs have been shaken by the country's economic downturn as much as federal and state joint unemployment insurance benefits. Along with a funding crunch brought about by record high unemployment rates, many states are now having to repay billions in federal loans granted under the American Recovery and Reinvestment Act. A recent study by The Tax Foundation's Joseph Henchman, titled "Unemployment Insurance Taxes: Options for Program Design and Insolvent Trust Funds," examined many of the problems facing UI programs, and proposed several bold solutions to protect assistance to the unemployed in the future. 

Some of the study's findings are startling. In the past two years alone, 34 states depleted their UI funds and borrowed a combined $37 billion from the federal government. The report also cites a statistic claiming that between 2008 and 2011, "$174 billion was paid in unemployment taxes while $450 billion was paid out in benefits." 

Much of the blame can be laid at the feet of state governments that failed to build up reliable reserves during times of economic expansion. At the same time, benefits have continued to rise. The average duration of benefits stood at just 15-16 weeks when the program began in the 1930's, but has risen to around 26 weeks today. Both the federal and state governments are also prone to temporarily increase benefits while unemployment is high. In certain cases, unemployed workers are currently eligible for up to 99 weeks of benefits.

The consequences are just rising to the surface. For many of the states that received federal UI loans, interest payments were scheduled to begin on September 30, 2011. Failing to make these payments, however, will mean higher UI taxes for employers in those states, as a federal mechanism kicks in to automatically reclaim payments. According to the report, three states (Indiana, Michigan, and South Carolina) are already scheduled to pay higher federal UI taxes. The same may happen to 23 other states as early as January 2012.

Given these circumstances, the report suggests that the time for real unemployment insurance reform is now. A handful of states have approached the issue on their own. Florida, as State Budget Solutions pointed out earlier this year, placed benefits durations on a sliding scale correlated with unemployment rates, and issued new requirements ensuring that benefit recipients actively seek work. Six states, according to The Tax Foundation, have cut the maximum length of benefits to below 26 weeks. 

Broader reforms, specifically targeting the relationship between the federal government and the states, should still be considered. One suggestion made by the author is to end the "‘firewall' between administrative funds and benefits funds," that often creates a disincentive for states to find new ways to help the unemployed. Another idea builds on the model of workers compensation programs. Employers would have to demonstrate their own means of providing unemployment benefits, whether it be through private insurance, self funding, or participation in a state program. Finally, the paper suggests private accounts in which workers are required to save to until a specified savings total is reached. 

Whatever solutions would be most effective at fixing the currently broken system, the paper is right to get the conversation started on unemployment insurance reform. Recent economic troubles have certainly highlighted the shortcomings of the current system. 



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