Unemployment Insurance is Insurance?

Not everything named insurance is insurance. - Thomas Sowell

Rising unemployment insurance taxes?

"Rising unemployment has placed such a burden on states that 30 of them owe the federal government $42 billion in money borrowed to meet their unemployment insurance obligations. Three states already have had to raise taxes to begin paying back the money they owe. More than 20 other states likely would have to raise taxes to cover their unemployment insurance debts. Under federal law, such tax increases are automatic once the money owed reaches a certain level.

Under the proposal, the administration would impose a moratorium in 2011 and 2012 on state tax increases and on state interest payments on the debt.

In 2014, however, the administration proposes to increase the taxable income level for unemployment insurance from $7,000 to $15,000. Under the proposal, the federal unemployment insurance rate would be adjusted so that the new higher income level would not result in a federal tax increase, the person familiar with the plan said." (1)

How is your state doing?

"Due to record high unemployment claims and in many cases poor financial planning, 25 states have run out of funds and been forced to borrow from the federal government, raise taxes or cut benefits. Increasingly, those fiscal woes are landing at the doorstep of business owners and unemployed workers. Employers in 36 states face unemployment insurance tax increases ranging from a few dollars to nearly $1,000 per worker for 2010, and six states have taken steps to cut back or freeze benefits". (2)

You can find a search-able data base for each state regarding tax increases and/or benefit cuts associated with state unemployment insurance at the following link:

http://projects.propublica.org/tables/unemployment-tax-increases-by-state-2010

Which states unemployment funds are bankrupt and borrowing atop of bankruptcy?

"The unemployment insurance system is in crisis due to a combination skyrocketing unemployment and – in some cases – poor planning. A record 20 million Americans collected unemployment benefits last year, and thirty states have run out of funds and been forced to borrow from the federal government, raise taxes, or cut benefits. In many other states the situation is deteriorating fast. Using near real-time data on state revenues and the benefits they pay out, we estimate how long state trust funds will hold up. Click on a state to find the latest, plus historical data, and details on tax increases and benefit cuts." (3)

The following is a link to a map showing which states unemployment funds are not only bankrupt but are borrowing to boot:

http://projects.propublica.org/unemployment/

Unemployment insurance is insurance? A social insurance safety net?

Unemployment insurance is not "insurance" in the traditional sense. It looks like insurance, is portrayed as insurance, is sold by politicos as insurance, has insurance in its name, but sorry its not insurance.

Unemployment insurance, like most social insurance schemes, is not a reserved insurance plan as found in the realm of private sector insurance. Rather its a quasi-reserved scheme which depends on the taxing ability of a central government to supply benefits. Unemployment insurance suffers from the same basic problems that exist in other social insurance schemes such as Medicare, Social Security and your newest friend ObamaCare.

Social insurance schemes work nicely as long as no one uses the benefits. What? Insurance is to pay for sudden claims? That you are transferring a risk for a consideration. If a loss occurs then your consideration paid is your basis for your ability to make claim. Then why does the social insurance scheme only work if you don't make a claim? That makes no sense!

It makes total sense. You see, a social insurance scheme is not reserved to pay claims or is only thinly reserved. When claims roll in the quasi-reserve is quickly depleted. The reason the reserve is quickly depleted in that the system is based on "pay as you go". The pay as you go system quickly breaks down when current claims exceed current tax dollars flowing into the plan. The result being an increase in tax and a rationing of benefit. Its an old story.

The political-economy of disincentives followed by more disincentives

Politicos at the federal level used borrowed money to create a disincentive to work (the time period from 26 weeks to 99 weeks of unemployment benefits). The states used borrowed money as well [borrowing from the borrower i.e. feds] to create a disincentive to work (give the scheme the benefit of the doubt and say the marginal end of the 26 weeks creates a disincentive).

Wait! Its a social safety net that helps the unemployed. Yes and no. First we have to understand that as far as an insurance plan its a political mirage that doesn't pay the benefit advertised. That the benefit paid merely results in an increase in taxes paid and/or a reduction in benefit paid. However, studies show that when people collect benefits that on average people stay on the benefits until the last four weeks before the benefit ends. Hence we have a social safety net that creates a moral hazard of staying on the benefit until the end of the benefit period which is then a disincentive to seek employment, on average, in an expeditious fashion. (4)

Politicos through the mechanism of government have gone way beyond the moral hazards associated with 26 weeks of unemployment and have created 99 weeks of unemployment. The disincentive to seek work has exponentially increased. Further, there is a grand difference between seeking work near the end of a 26 week period vs. the end of a 99 week period.

Creating disincentives is bad economic policy. However, if you borrow money to create a disincentive, that is pure madness. Moreover, if sub-governments [states]borrow money from a central government, who is simultaneously borrowing, you are then borrowing from the borrower to create disincentives which is maximum insanity.

Welcome to The Asylum for the Disincentive Borrower. Those that have created disincentives go onto create yet another disincentive: doubling the unemployment "insurance" tax. Hence politicos through the mechanism of government have created disincentives through 99 weeks of unemployment insurance merely to turn around and create an additional disincentive for firms to hire those that are in fact unemployed.

Exactly what kind of insane exercise is this little trip into the vortex of disincentive? Once politicos have entered the vortex of disincentive they somehow portray this entire exercise as being beneficial to John and Jane Goodfellow. How so? Politicos then frame this disincentive boondoggle as economic stimulus!

Let me say that unemployment insurance… is one of the biggest stimuluses (sic) to our economy. Economists will tell you, this money is spent quickly. It injects demand into the economy, and it’s job creating. It creates jobs faster than almost any other initiative you can name. - Nancy Pelosi (5)

Notes:

(1) http://www.canadianbusiness.com/markets/headline_news/article.jsp?content=b5884614&utm_source=markets&utm_medium=rss

(2)http://projects.propublica.org/tables/unemployment-tax-increases-by-state-2010

(3)http://projects.propublica.org/unemployment/

(4)http://townhall.com/columnists/ThomasSowell/2010/08/27/moral_hazard_in_politics

(5) http://blog.heritage.org/2010/07/07/pelosi-unemployment-benefits-biggest-stimulus-for-economy/