How to build a better safety net

The social safety net in the United States has gradually frayed. People have less protection against financial shocks, such as job loss or huge medical bills. Economist Jared Bernstein sees the resulting shift to greater economic insecurity as creating "you're on your own economics."

This insecurity has been getting more political attention.

It needs it. The volatility of family incomes has grown decidedly. In any given two-year period since the early 1970s, about half of all US families experienced a drop in real income. In the 1970s, that drop was typically about 25 percent. But since the late 1990s, families in that category experienced a median drop in income of about 40 percent, finds Jacob Hacker, an economist at Yale University in New Haven, Conn.

"There is an opening for a pretty different approach to government," says Mr. Bernstein, with the Economic Policy Institute, a liberal Washington think tank. But policy "evolves glacially," he cautions.

In recent years, economic risks have been shrugged off by employers and society onto individuals.

For example, far fewer firms offer traditional defined-benefit pensions, where the employer assumes the investment risks and the employee receives a steady pension upon retirement. Instead, many firms provide less generous 401(k) plans in which employees absorb the risk of managing their own pension money.

Similarly, many employers are pushing the cost and risks of health insurance onto employees. And employees are less likely to be covered by unemployment insurance if they are laid off.

Political conservatives, many Republican, point to distortions to economic incentives that can result from badly designed social programs that thereby damage overall economic performance. They tend to favor cutting taxes rather than redistributing income, a liberal desire.

Economist Peter Orszag would like to bridge this policy gap between conservatives and liberals. He's director of the Hamilton Project, an initiative of the Brookings Institution in Washington, aimed at rebuilding the safety net in a way that doesn't harm free-market incentives that stimulate output and efficiency.

His thesis is that "long-term prosperity is best achieved by making economic growth broad-based, by enhancing individual economic security, and by embracing a role for effective government in making needed public investments."

In other words, Mr. Orszag holds that if Americans are less fearful for their economic safety, they are more likely to make investments in education or business that may involve considerable personal risk but can also enhance their own – and the economy's – prosperity.

Last week, Hamilton Project economists proposed education and unemployment insurance reforms intended to make economic security and economic growth mutually reinforcing.

As it is, the increased flexibility of the American labor market, with its relative ease of hiring and firing workers, has had costs for employees. The average spell of unemployment now is 16 weeks, up from about 12 weeks in the 1960s. When displaced workers do find a full-time job, roughly half of them (according to 2003-05 statistics) had a drop in earnings. Nearly one-third saw earnings dip 20 percent or more, notes a paper by Orszag and two other economists.

Further, the fraction of jobless workers receiving unemployment insurance benefits fell from 50 percent in the 1950s to about 35 percent in the 1990s.

That paper notes other signs of increased insecurity. Health-insurance premiums have risen from 8 percent of median family income in 1987 to 17 percent in 2003. In 2005, just 60 percent of the population was covered by employer-provided health coverage, down from 64 percent in 2000.

Contrary to conventional wisdom, though, employees have not experienced widespread substantial declines in job tenure over the 1969-2002 period. Quizzed toward the end of their working careers, men aged 58 to 62 had an average tenure (in the job they held for the longest period) of 21.9 years in 1969. The comparable tenure in 2002 was 21.4 years, not much different, finds Ann Huff Stevens, an economist at the University of California, Davis, in a recent paper.

In an effort to trim economic insecurity, a project paper by Brookings Institution economist Jeffrey Kling proposes restructuring unemployment insurance to provide wage-loss insurance. It would give financial aid to laid-off workers with new lower-paying jobs for up to six years. It wouldn't cover highly paid employees. But it would cut in half, from 14 percent to 7 percent, the share of laid-off workers who suffer very large drops in earnings.

Another Hamilton Project paper calls for federal standards for the level and duration of unemployment benefits (now set largely by states). And economists Lori Kletzer and Howard Rosen also suggest tax-favored unemployment accounts and an insurance program to smooth out income after wage losses.

These are called "discussion" papers. Orszag is aware that think-tank proposals often end up on shelves and not in congressional bills. But he hopes that a high-powered advisory council (including two former Treasury secretaries) will help lead to a bipartisan consensus on reforms to raise economic security.

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