Should America Change The Unemployment Safety Net - A New NCPA Study Shows Surprisingly that Chile is Leading the Way

Commentary by Pete du Pont

It's time to look at alternatives to the safety net in America. Our system has changed little since the 1930s when most workers were male, in industrial occupations and part-time work was not common. Surprisingly, a new study by the National Center for Policy Analysis shows that the best place to look for changes in the antiquated U.S. system is Chile.

Chilean leaders have shown a remarkable willingness to weave a social safety net in several new and imaginative ways, according to the study's author and NCPA Senior Fellow William Conerly. Chile was the first country in the Western hemisphere to set up a social security system; it was also the first to reform it using individual investment accounts.

Historically, Chile has had a system of meager unemployment insurance funded by limited public benefit and the few companies who paid severance to displaced workers. Chile's system recently has been reformed almost wholly with individually owned retirement accounts.

Workers pay a 0.6 percent payroll tax into an individual unemployment account, while employers split a 2.4 percent tax between the worker's individual account and a joint account, so that employers are paying 80 percent of the cost of unemployment benefits. The funds are invested conservatively by the same private pension funds that manage Chilean workers' retirement accounts, and can only be drawn when the worker is unemployed or retired. Unemployed Chileans can draw 30 to 50 percent of previous wages for up to 5 months from their individual account.

The joint account provides benefits to the unemployed who exhaust balances in their individual account. In addition, unlike the U.S. system, Chileans can draw funds even if they quit or were fired from their jobs, allowing workers more flexibility in changing employers.

Chile's is a compulsory savings plan for individual workers. So, unlike the U.S. system where workers are treated as a group, Chilean workers benefit even if they're never unemployed. And the advantages are clear:

  • Workers can withdraw funds even if they quit or are fired.
  • The system avoids the cost of adjudicating whether termination was voluntary or "for cause."
  • Workers have no economic incentive to delay re-employment.
  • Workers can access unspent funds during retirement.

So what are the best policy alternatives to today's unemployment safety net? As Conerly points out, we could adopt the Chilean system, but our work forces differ. Today, most American workers are employed in service industries, part-time employment is common, and women account for nearly half of the work force. Conerly suggests that we adopt those features of the Chilean system that fit our economy:

  • Individual retirement accounts.
  • Subsidies to industries that not only employ unemployed workers, but also provide mentoring and on-the-job training.
  • Allow both public and private sector employers to self-insure against unemployment claims.

The most interesting shift in the U.S. economy has been the prevalence of women in the work place. And it's worth noting that the NCPA's Women in the Economy project, directed by Senior Fellow Celeste Colgan, advocates several additional safety net initiatives that would empower all workers as well as foster fairness. These include lower marginal tax rates, regardless of marital status; personal and portable retirement savings (pensions) with early vesting; personal retirement accounts, much like Chile's individual accounts; and consumer-driven personal and portable health and child care.

Probably the most important safety net reform, however, is state experimentation. The greatest achievements in welfare reform have come from state experiments with alternative systems under waiver from the 1996 federal welfare reform law. We need the same approach in unemployment.