Forget the jobs bill. Workers need a better safety net for layoffs.
The jobs bill will deepen debt at a time when state unemployment trust funds are going bankrupt. Current jobless benefits are a bad deal. Chile’s plan provides real security.
Arlington, Va. — Congress began 2010 with a bad case of legislative déjà vu. Last year, it approved a $787 billion stimulus package meant to "create or save" millions of jobs. President Obama says the stimulus has saved or created as many as 2 million jobs so far. But even if that highly optimistic figure is true, in the real world, over 3 million jobs have been lost since the stimulus was signed into law – a dismal feat all financed with enormous debt.
Now Congress is working on another stimulus package, but they're calling it a jobs bill. In December, the House passed a $174 billion "Jobs for Main Street Bill" that would use federal dollars to fund job-creating infrastructure projects, while extending unemployment benefits. The Senate this week moved ahead on a much-leaner jobs bill. Sound familiar?
Unemployment remains at about 10 percent and state unemployment insurance funds are running out of money. While the Obama administration works to artificially inflate the number of jobs, the unemployed face diminished opportunities and income security. By 2012, 40 state unemployment trust funds are projected to be empty, requiring $90 billion in federal loans to continue operating.
Normally, state unemployment benefits pay jobless workers between 50 and 70 percent of their salaries for up to 26 weeks. But during this recession, Congress has extended those benefits four times. The result is that some workers can now claim benefits for 99 weeks – almost two years.
Now Congress may enact a record fifth extension. What would be wrong with that? Everything. The state-federal unemployment insurance program (UI) is an economic drag on businesses and states. And it's a poor safety net for the unemployed.
UI, a relic of the Great Depression, fails workers when they need it most. UI trust funds depend on a state-levied payroll tax on employers. During boom years, these funds are generally flush. But during recessions, they can get depleted quickly.
The bind is that to replenish their UI fund, states have to raise payroll taxes. That hurts the bottom line for businesses both large and small. Passed on to workers as a lower salary, high payroll taxes discourage businesses from hiring.
During steep recessions, states face a fiscal Catch-22: Reduce benefits or raise taxes. To date, 27 states have depleted their UI funds and are using $29 billion in federal loans they'll have to start repaying in 2011. Other states are slashing benefits. Kentucky House members passed a measure in February to increase employers' contributions (read: a tax hike) and cut benefits from 68 percent to 62 percent of wages.
While federal guidelines recommend that states keep one year's worth of unemployment reserves, many states entered the recession already insolvent. When federal loans are exhausted, the only option left is higher payroll taxes – a move sure to discourage hiring and depress salaries.
The increasingly small and uncertain payouts of UI are the opposite of income security. The effect of UI's eight-decade experiment has been to condition workers to save less for a "rainy day" and instead rely on a system that provides no guarantee. UI limits personal responsibility to save; gradually, individuals find themselves in financial peril.
Unfortunately, subsidizing the status quo is the prescription of the moment, making the best solution the least likely to happen. Real reform requires putting employees in charge with individual private accounts and getting the government out of the business of creating illusionary safety nets.
Unemployment Insurance Savings Accounts (UISA), by contrast, give workers control of their own income, eliminating the negative effects of the UI program on businesses and budgets.
Adopted by Chile in 2003, UISAs are also financed via a payroll tax on individual workers and employers. The difference is the money is directly deposited into the individual worker's account.
Basically a form of forced savings, UISAs allow individuals to draw on their own accounts during periods of unemployment and roll unused funds into their savings upon retirement. With the burden reduced on employers, wages rise, leading to greater contributions to the individual's fund. The federal government is removed from the picture, and all workers are guaranteed a savings account upon retirement.
UISAs liberate workers from uncertainty and improve incentives. When unemployed workers must rely on their own funds rather than the common fiscal pool, they find jobs faster. Congress's repeated extensions of the current UI program may be well intended, but they may also be counterproductive. Like any deadline extension, additional jobless benefits diminish the job seeker's urgency, all at taxpayers' expense.
Today, expanded UI benefits mean higher state payroll taxes, which make it harder for employers to expand hiring or raise wages. UISAs, on the other hand, make the payroll tax on business part of the employer's investment in an individual worker, rather than a penalty for doing business.
In 2010, it's time to say goodbye to the problems created by broken policies. Congress should start this decade with a promise for true economic freedom: Let businesses create jobs and let workers keep what they've earned.