A Practical Plan to Strengthen the Unemployment Insurance System (UPDATED)

UPDATE: FEB. 17 - UNEMPLOYMENT INSURANCE SOLVENCY BILL INTRODUCED IN SENATE
Senator Richard Durbin (IL), with Senators Jack Reed (RI) and Sherrod Brown (OH), today introduced the Unemployment Insurance Solvency Act of 2011, which offers immediate tax relief to cash-strapped states and employers, preserves UI benefit levels, and creates strong incentives for states to restore their UI programs to solvency while also rewarding states that have managed their UI trust funds effectively.

In a statement, NELP Executive Director Christine Owens said, “Jobless workers, and we hope employers too, should be grateful for the leadership of Senator Richard Durbin and his colleagues Sherrod Brown and Jack Reed on the issue of unemployment insurance solvency.  Following the President’s FY 2012 budget, the introduction of the Unemployment Insurance Solvency Act sets the stage for a serious conversation on how to make sure that the safety net tens of millions of Americans have counted on during the tough times of the last few years will be financially secure into the future.”

The new bill is similar to the plan outlined by President Obama in his remarks last week, but adds further protections for benefits and additional opportunities and incentives for states to return to solvency in the long run. 

Original Post: Feb. 11

Unemployment insurance is just that -- insurance -- and it's financed by premiums paid on workers' paychecks and deposited into a trust fund.  However, the unemployment insurance (UI) trust funds in many states are not only insolvent, but now face heavy debt burdens due to their increased need for federal borrowing during this prolonged period of high unemployment.  Restoring them to financial health is essential to ensure that unemployment insurance benefits are there for workers when they're needed, both today and in the future.  The Administration has outlined a significant framework to address the problem, which would provide needed debt and tax relief to states and businesses.

A new plan from the National Employment Law Project (NELP) and the Center on Budget and Policy Priorities (CBPP) would build on that framework, further strengthening the long-term solvency of state UI systems while avoiding benefit cuts and employer tax increases.  Workers need to pay attention to this issue.  The last time UI trust funds got hit this hard, in the 1980s, 44 states cut back benefits for workers.

Many states UI trust funds have been hit in recent years by a double-engine freight train.  First, for years many states have inadequately financed their UI funds, both by keeping their taxable wage base for UI too low relative to inflation-adjusted dollar values, and by taking a dangerous "pay-as-you-go" approach, which failed to build adequate reserves during periods of economic growth.  The graph below shows the substantial erosion in the inflation-adjusted value of the wage base that is subject to the UI taxes that fund state systems.  What does this mean?  It means that the employer of a dishwasher pays the same unemployment premium as the employer of a banker.  It does not take a degree in actuarial science to know that this is not going to work.

Value of UI Taxable Wage Base, Adjusted

And oh yeah, second -- well, then came the Great Recession with millions of workers' jobs being lost and the vastly increased need for unemployment benefits to help sustain unemployed job-seekers and their families.

Now, 30 states have exhausted their UI trust funds and are borrowing from the federal government.

The lead editorial in The New York Times yesterday, titled 'Relief for States and Businesses', explained the need for the Obama administration's approach.  Here are some excerpts:

So many people now receive jobless benefits that 30 states have run out of their unemployment trust funds and are borrowing $42 billion from the federal government. Three of the hardest-hit states — Michigan, Indiana and South Carolina — have borrowed so much that they triggered automatic unemployment tax increases on employers, and the same thing is likely to happen to 20 more states this year.

....

On Tuesday, the Obama administration unveiled a smart proposal to delay those tax increases and provide some relief to both employers and state governments. Congressional Republicans reflexively objected to the idea, which could produce higher taxes in three years, but this plan provides relief that might stimulate hiring now when it is most needed.

....

Under the plan, which is subject to Congressional approval, there would be a two-year moratorium on the increased taxes that employers would otherwise have to pay to support the unemployment insurance system, which could save businesses as much as $7 billion. During those same two years, states would be forgiven from paying the $1.3 billion in interest they owe Washington on the money they have borrowed.

....

In 2014, when the economy will presumably have recovered somewhat, employers will have to make up for the moratorium by paying higher unemployment taxes to the states. Specifically, they will have to pay taxes on the first $15,000 of an employee’s income, instead of the current $7,000. But, even then, unemployment taxes will be at the same level, adjusted for inflation, as they were in 1983, when President Ronald Reagan raised them.

The administration is proposing to cut the federal unemployment tax rate in 2014 so that employers would pay the same amount to Washington as they do now. States, if they choose to do so, could collect more from each employer to repay the federal government and restock their own unemployment trust funds.

....

The full details of the plan’s costs and benefits will be available when President Obama submits his 2012 budget to Congress next week. When he does, both parties should take a close look at the numbers and seize the opportunity to keep this fundamental safety net solvent.

"It is a major step forward for the President’s FY 2012 budget to address the UI trust fund crisis," said Andrew Stettner, deputy director of the National Employment Law Project and a co-author of the new joint NELP-CBPP policy proposal.  "Our proposal rests on the same core principles — giving employers and states relief now while taking concrete steps to restore the long term solvency of the UI trust fund as the economy recovers.  The plan endorses two key aspects of what the Administration’s proposal reportedly includes — raising the taxable wage base up from the inadequate, outdated level of $7,000 and endorsing a two-year moratorium on federal UI tax increases."

The NELP-CBPP plan, detailed in a new report, would enable states to restore the solvency of their UI trust funds, avoid significant tax increases on employers during a weak economy, and prevent damaging cuts in UI eligibility and benefits for jobless workers, without increasing the deficit.  The plan also suggests additional debt relief for states and positive incentives for employers, rewards states that have maintained sound financing packages, and builds on existing federal protections of state benefit levels.

In a statement, the groups provide a summary of the plan:

• The federal government would gradually raise the amount of a worker’s wages subject to the federal UI tax (i.e., the FUTA taxable wage base). This would automatically raise the floor for the taxable wage bases in the states which by law cannot be lower than the federal wage base, helping those states rebuild their trust funds. (The federal UI tax rate would fall, however, so that overall federal UI taxes did not go up.)

• The federal government would provide a moratorium, until 2013, on state interest payments on their UI loans.

• The federal government would also postpone, for two years, the FUTA tax increases required to recoup the loan principal in borrowing states.

• The federal government would offer immediate rewards and future incentives for states that currently have and continue to maintain adequate trust fund levels.

• The federal government would excuse a state from repaying part of its loan if the state (a) enters a flexible contractual agreement with the U.S. Labor Department to rebuild its trust fund to an appropriate level over a reasonable number of years, and (b) agrees to maintain UI eligibility, benefit levels, and an appropriate tax rate over the loan-reduction period.

This plan would produce the following benefits:

• Employers would not pay higher federal UI taxes until the beginning of 2014, saving them $5 billion to $7 billion while the economy remains weak and $10 billion to $18 billion over the next five years. Also, employers would pay no additional assessments to cover interest payments in 2011 or 2012, saving them $3.6 billion.

• In addition, partial loan forgiveness that comes from a state’s commitment to build adequate trust funds would save employers about $37 billion by the end of the decade. Counting the interest payments on this principal as well, employers could save as much as $50 billion.

• All or nearly all states would assume a path to permanent solvency.

• Employers in responsible states would receive concrete rewards and a more level playing field between the states.

• Adequate trust funds would stabilize UI tax rates over time, avoiding the roller-coaster tax rates common in many states — very low during healthy economic times, rising rapidly during recessions — that harm businesses and the economy.

• States would maintain current UI benefit and eligibility levels.

• The federal deficit would not rise as a result of these policies.

“States face a tremendously urgent crisis when it comes to their unemployment insurance trust funds,” said Michael Leachman, assistant director of the Center’s State Fiscal Project and co-author of the report. “If federal policymakers address this crisis using our plan, employers could save as much as $50 billion in taxes and states would maintain the critical benefits they provide to people who lose their jobs.”

 

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