Unemployment Self-Insurance
By Howard Levine
January 9, 2003
President Bush has made an interesting proposal for unemployment insurance funds that would give unemployed workers $3000 to spend for expenses related to finding a new job. In order to encourage a faster, more economical job search, any funds remaining would be available to the unemployed person in cash after he found a job and held it for a minimum period. I think the objective of giving people incentives to find a job and get off unemployment benefits is good, but I think this could be accomplished more efficiently with less tax money while still helping people handle economy related job transitions (AKA layoffs).
The current unemployment insurance (UI) program is employer based rather than employee based. Experience rating with unemployment insurance claims is used to determine UI tax rates for employers based on the company claims rate. Ultimately, however, the worker, by choice of jobs, work habits, training, and ability has more control over his employability than the company he works for. There are also incentive issues that might encourage low wage employees who want paid time off to try to get laid off without getting fired for a cause that would make them ineligible for UI benefits. Plus, if a worker is laid off, there is more incentive to delay accepting a job because UI benefits are available at no cost to the individual unemployed worker. This is a problem the $3000 UI account is designed to help solve.
There is a much simpler solution to the UI benefit problem that preserves individual choice and keeps costs down for taxpayers. UI taxes currently paid by employers on behalf of their employees could be directly funded by employees with the money from each employee going into his individual UI account. Since the UI tax is actually paid by workers indirectly because employers take UI taxes into account when setting wages and salaries, this will not hurt employees. Employees will simply pay directly rather than indirectly. Benefits would be financed through self insurance supplemented with government loans up to a specified limit, say $5000, available to people who overdraw their accounts. Interest of 1% over the short term rate for government bonds and notes could be charged to provide some incentive for keeping the debt low and paying it off as fast as possible. Positive balances could earn interest in money market accounts backed by government or high rated corporate bonds and notes.
Workers would pay a 10% “tax” on their earnings. This “tax” would be used to make contributions to their UI accounts and pay off any loans associated with their UI accounts. If a worker has accumulated a sufficient balance, say $25000, in his UI account, he would be able to withdraw excess money to use for other purposes. Upon retirement, the worker could withdraw all of the funds for personal use. Of course, any debts would have to be collected from Social Security and other retirement benefits in order to avoid giving people with UI debt an incentive to take a taxpayer funded “vacation” before retiring.
With this approach, people would not have to apply for UI benefits. They would simply have to show some evidence of unemployment such as reduced contributions to their account. The stringency of the documentation would depend upon the balance in the worker’s UI account. For accounts having a balance over $10000, little documentation would be necessary. A balance less than $10000 would require more stringent checking. Having to borrow money would require the most stringent documentation. Of course, some administrative rules would have to be put in place to keep people from draining their accounts when they are employed full time. Also, there could be limits on the amount of money withdrawn each week or month as well as a check to see if money is coming into the account through payroll deductions. However, the rules should not be too much of a problem if people know they will get their money back as they pass the $25000 level in their UI accounts and when they retire. Since workers will be self insuring themselves, they will have appropriate incentives to find a new job as quickly as possible, keep costs down, and use their money wisely.
There would be some costs for monitoring the accounts, but they could be administered by private companies much like IRAs and 401K plans are today. There would also be some costs for loan defaults, but that should be much less than the cost of supplemental UI benefits paid out currently.
A system like this would provide the right incentives for everyone, encourage productivity, keep costs down, and reduce government spending. It provides a safety net that is consistent with freedom and respect for private property.
By Howard Levine
January 9, 2003
President Bush has made an interesting proposal for unemployment insurance funds that would give unemployed workers $3000 to spend for expenses related to finding a new job. In order to encourage a faster, more economical job search, any funds remaining would be available to the unemployed person in cash after he found a job and held it for a minimum period. I think the objective of giving people incentives to find a job and get off unemployment benefits is good, but I think this could be accomplished more efficiently with less tax money while still helping people handle economy related job transitions (AKA layoffs).
The current unemployment insurance (UI) program is employer based rather than employee based. Experience rating with unemployment insurance claims is used to determine UI tax rates for employers based on the company claims rate. Ultimately, however, the worker, by choice of jobs, work habits, training, and ability has more control over his employability than the company he works for. There are also incentive issues that might encourage low wage employees who want paid time off to try to get laid off without getting fired for a cause that would make them ineligible for UI benefits. Plus, if a worker is laid off, there is more incentive to delay accepting a job because UI benefits are available at no cost to the individual unemployed worker. This is a problem the $3000 UI account is designed to help solve.
There is a much simpler solution to the UI benefit problem that preserves individual choice and keeps costs down for taxpayers. UI taxes currently paid by employers on behalf of their employees could be directly funded by employees with the money from each employee going into his individual UI account. Since the UI tax is actually paid by workers indirectly because employers take UI taxes into account when setting wages and salaries, this will not hurt employees. Employees will simply pay directly rather than indirectly. Benefits would be financed through self insurance supplemented with government loans up to a specified limit, say $5000, available to people who overdraw their accounts. Interest of 1% over the short term rate for government bonds and notes could be charged to provide some incentive for keeping the debt low and paying it off as fast as possible. Positive balances could earn interest in money market accounts backed by government or high rated corporate bonds and notes.
Workers would pay a 10% “tax” on their earnings. This “tax” would be used to make contributions to their UI accounts and pay off any loans associated with their UI accounts. If a worker has accumulated a sufficient balance, say $25000, in his UI account, he would be able to withdraw excess money to use for other purposes. Upon retirement, the worker could withdraw all of the funds for personal use. Of course, any debts would have to be collected from Social Security and other retirement benefits in order to avoid giving people with UI debt an incentive to take a taxpayer funded “vacation” before retiring.
With this approach, people would not have to apply for UI benefits. They would simply have to show some evidence of unemployment such as reduced contributions to their account. The stringency of the documentation would depend upon the balance in the worker’s UI account. For accounts having a balance over $10000, little documentation would be necessary. A balance less than $10000 would require more stringent checking. Having to borrow money would require the most stringent documentation. Of course, some administrative rules would have to be put in place to keep people from draining their accounts when they are employed full time. Also, there could be limits on the amount of money withdrawn each week or month as well as a check to see if money is coming into the account through payroll deductions. However, the rules should not be too much of a problem if people know they will get their money back as they pass the $25000 level in their UI accounts and when they retire. Since workers will be self insuring themselves, they will have appropriate incentives to find a new job as quickly as possible, keep costs down, and use their money wisely.
There would be some costs for monitoring the accounts, but they could be administered by private companies much like IRAs and 401K plans are today. There would also be some costs for loan defaults, but that should be much less than the cost of supplemental UI benefits paid out currently.
A system like this would provide the right incentives for everyone, encourage productivity, keep costs down, and reduce government spending. It provides a safety net that is consistent with freedom and respect for private property.
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