June 05, 2009
Unemployment Insurance Buckles After Years of Underfunding
by Olga Pierce, ProPublica
(June 3, 2009) Half a million Americans lost their jobs in April, meaning there are now officially 14 million unemployed workers, the highest percentage in 25 years, and the strain on the unemployment system is beginning to show.
A compromise dating back to 1935 means each state has its own unemployment insurance system, with wide latitude to set taxes and benefit levels. As state systems buckle under the weight of skyrocketing unemployment, the fault lines of the current structure have been brought into stark relief.
States have been left on their own to financially founder or prosper, and benefits vary nearly as much as the health of state systems.
eKC Editor’s Note: Missouri and Kansas differ in their unemployment situation:
Fourteen states have simply run out of money to pay benefits and been forced to borrow from Washington a total of more than $8 billion. That number is almost certain to grow as more states reach the brink. If they are not able to pay that amount back before 2011, which most will not be able to do, they face paying hundreds of millions of dollars in interest.
Meanwhile, many workers are struggling to get by on what the system pays them. Where you live can make all the difference — workers in the most generous states get twice the average benefits of workers in the stingiest ones. The percentage of unemployed workers who even receive benefits varies greatly by state.
In theory, unemployment insurance serves a dual purpose.
First, as President Franklin Roosevelt assured a crowd of impoverished Pennsylvania coal miners in 1937, it should "substitute for uncertainty a new security in the life of the wage earner and his family."
Michael Dymond, 40, a single father in Portland, OR, who recently lost his job welding rail cars after nine years, put it another way: "If there was no unemployment insurance it would be devastating ... Without it I would have no job, no car, no home. I would be out on the street."
Unemployment insurance is also intended to be automatic stimulus during a recession, keeping people spending and businesses open.
"The idea is you accumulate reserves and then you can support spending when the economy goes south," said Gary Burtless, an economist at the Brookings Institution.
But many states have failed to do that, and they're now paying the price. Indiana, which ran out of reserves last year, just raised its unemployment taxes by 35 percent, right in the middle of a deep recession when businesses can least afford it.
The current fractured system is, in part, the result of differing attitudes in states dating back to the 1930s. Fearing a potential Supreme Court challenge, Roosevelt proposed a system in which each state would choose whether and how to operate its own system, encouraged by a federal tax incentive.
Some states, like Wisconsin, had already developed their own unemployment systems before there was a federal system. Others, like Virginia, refused to participate in the federal system for years afterward.
Different attitudes about unemployment insurance persist and influence the levels of funding and benefits in each state.
During the severe recession of the 1970s, many state trust funds went bust, and the federal government stepped in to lend them money. As a result of the experience, some states, such as Oregon, changed their laws to ensure that money would be available for unemployment insurance when they needed it.
"In the past there was a conscious decision in Oregon between labor and management that we were going to operate the unemployment insurance trust fund in a manner where both sides could be relatively certain it would maintain solvency," said state Rep. Brad Witt, who sits on the House Business and Labor Committee.
Other states did not plan as well. Many have been maintaining close to zero reserves for years, well before the economy headed south. California, for example, got into trouble by raising benefits without increasing taxes. Other states, like Michigan, lowered taxes to unsustainable levels and watched their reserves dwindle.
Now, these states will be forced to raise taxes or cut benefits in the middle of a recession — just when those changes will do the most economic damage.
Separate systems also mean state lawmakers must worry about the possibility of driving businesses out of their state — into other states that may be undercutting them with unsustainable tax rates, said Doug Holmes of UWC — Strategic Services on Unemployment and Workers' Compensation, who has advised many states on unemployment insurance from a business perspective.
"It is a competitive environment, let's face it," Holmes said. "Each state doesn't operate on an island."
The amount of benefits disbursed to unemployed workers to boost their spending also varies widely.
In Massachusetts, the average unemployed worker gets $411 per week. In Mississippi, where Gov. Haley Barbour recently called unemployment taxes "a tax on job creation," it's $197. Of course, a buck goes further in Mississippi — but not that much further.
On average, workers who rely on unemployment insurance get about half as much as they earned while they were working. In some states it is much less, and it may get lower as policymakers struggle to keep their unemployment insurance systems afloat.
There are also wide variations in the percentage of unemployed workers who collect benefits. Nationwide, only about 30 percent of workers who lose their job ever see an unemployment check, but in some states it is as high as 80 percent. Some of the variation is due to differences in who is allowed to collect benefits, some is because many workers — particularly in states where unemployment insurance is considered a welfare program — never apply.
Some states, virtually free from federal oversight, "set benefit levels too low, they don't save enough money during recovery periods, and they have restrictive administration of the program," said Rick McHugh of the National Employment Law Project, a group that advocates for low-income workers. "It may be time to re-examine the compromise that was made in 1935."
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