Are employee contributions essential to unemployment insurance?

A new report by Andrew Stettner, senior fellow at The Century Foundation, brings needed attention to the nation’s troubled unemployment insurance (UI) programs. The report concentrates on crucial financing questions, noting that the lack of UI state reserves prior to the Great Recession led to significant cuts in state programs in recent years, with benefit recipiency rates reaching historically low levels in 2014 and 2015. In particular, Stettner notes that six out of every seven unemployed individuals in the most restrictive Southern states go without benefits, a level that calls into question whether those states still provide meaningful social insurance. At the same time, low reserves continue to threaten a majority of states while we head inevitably toward the next recession. According to the report, only 18 states currently meet recommended trust fund levels.

Stettner recounts the main facts in his overview of recent UI developments, including recent state UI benefit cuts and financing changes. Despite these benefit cuts and financing changes, he reports that state reserves are less than 60 percent of the trust fund reserves found prior to the recent recession. Worryingly, many of the states adopting benefit cuts will remain at low solvency levels when the next recession arrives.

Wayne Vroman, a long-time expert on UI financing at the Urban Institute, has reinforced some of Stettner’s observations on UI financing in a recent report. Vroman has written about UI financing since the 1980s, and this report shows a troubling pattern he has called attention to in recent years. Our 13 biggest states—where about two-thirds of benefits are paid and UI taxes collected—do a remarkably poor job of UI financing. Vroman finds that “program revenue responded more slowly in the 13 big states and their benefits were reduced more when compared with the other states in the state UI system.” Vroman’s more technical approach presents a number of regressions trying to better understand why big states fail to adequately finance their state UI trust funds. While his paper can’t fully explain the big states’ failures, Vroman does identify factors that make UI financing stronger, most notably the indexation of the taxable wage base.

Stettner’s advocacy of employee UI payroll taxes adds an important element to the UI financing discussion. The vast majority of states rely entirely on employer payroll taxes to finance state UI programs, which generate a politically powerful lobby among employers that seek to keep them low. Stettner’s case for UI employee payroll taxes relies on two principal arguments. First, they play an important role in other social insurance programs, including Social Security and Medicare. Second, these employee UI taxes make employees in the three states (AK, NJ, and PA) that currently impose them much more aware of the existence of the UI program, leading to higher recipiency rates. Stettner does not claim, however, that imposing employee payroll taxes can ensure state solvency without overall strong financing measures.

Stettner summarizes his case by concluding that “employee taxes could fundamentally shift the political economy of UI, encouraging more workers to apply for benefits and providing a political counterweight to calls to restrict benefits.” I strongly agree and believe the idea deserves consideration at both the federal and state levels.

Both Vroman and Stettner point out obvious UI financing steps that states should carry out and that the federal government should encourage or require. These steps include raising the portion of wages covered by UI payroll taxes (the taxable wage base) and automatically increasing (indexing) it to keep pace with the growth in wages. The new element added to this mix is Stettner’s advocacy of UI employee payroll taxes. When combined with changes advocated in the Obama administration’s FY 2017 federal budget, a necessary and overdue dialogue about UI reforms is building.