Unemployment Insurance Desperate for Reform

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With unemployment figures hovering at a nine-year high, the time is ripe for federal reforms that would maximize the benefits of unemployment insurance (search) for the employed and unemployed alike.

Eliminating the fraud, abuse, and perverse incentives that currently plague state UI programs depends on such reform.

It is time for Congress (search) to grant waivers to states that are willing to craft innovative reforms, much like the feds did with the successful welfare endeavors of the 1990's.

Lawmakers in Washington state, which suffers from one of the highest unemployment rates in the nation, recently tinkered with its onerous UI system. They decreased benefits (to only twice the national average) and restricted eligibility to those who can prove they qualify. But the system itself is still fraught with perverse incentives. True unemployment insurance reform in all the states is limited by federal restrictions.

This is regrettable since the federal UI system is broken. So what should be done?

Answering that question requires an understanding of why unemployment insurance was created in the first place. It was originally designed to be an emergency safety net for folks who lost their job unexpectedly, through no fault of their own. The idea was to keep individuals and families from losing economic stability as they quickly and aggressively sought new work. It was never meant to be an ongoing economic bridge for seasonal workers.

The current system has strayed far outside the bounds of the original mold, becoming harmful to business, and as a result, to individual workers. The money businesses are forced to pay to UI comes out of the potential salaries and benefits of employees. These dollars are no longer available for workers to negotiate higher salaries or for the company to use to create new jobs.

Furthermore, if the money put into UI is for the worker’s benefit, shouldn’t it belong to the employees, not some state bureaucracy?

At the Evergreen Freedom Fou (search)ndation, we have published our suggestion for employee-owned UI accounts. We believe it is the best short and long term reform solution. This type of system would allow workers to take full advantage of every dollar they contribute for unemployment insurance. Personal savings funded by contributions from both the employer and employee would be deposited into an interest-bearing account. Employees who fall on hard times could make withdrawals from their accounts. Money they do not use could be rolled into a retirement fund.

A system of individually-owned UI accounts has many benefits. It allows employees to voluntarily move to new jobs without penalty, all but eliminates fraud and abuse, and removes the perverse incentives present in our own system that make it profitable to stop working or delay getting rehired as long as possible. Because individuals are spending or saving their own money, a healthy set of motivations and a new sense of ownership and responsibility is introduced.

This model is already being successfully implemented in Chile. Under the Chilean system, employees contribute 0.6 percent of their earnings to their unemployment account. Employers also contribute 2.4 percent to the individual accounts and a joint account which workers can draw benefits from in the event they use up their own funds.

Workers in Chile, unlike the U.S., are permitted to draw funds (usually 30 to 50 percent of their previous salary for as long as five months) even if they quit or are fired from their jobs. After all, the money is theirs.

A system of individual, employee-owned unemployment insurance accounts provides a safety net for employees and is the fairest system for everyone. To get there, however, federal law must be changed. But just as welfare reform began with action in the states, unemployment insurance reform can as well. State lawmakers should ask Congress to grant waivers for demonstration projects that set an example of what can be done right for employees and the businesses who hire them.

Jason Mercier is a budget analyst for the Evergreen Freedom Foundation, a Washington state-based policy research organization.

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