NCPA - National Center for Policy Analysis

PERSONAL RETIREMENT ACCOUNTS WORK

March 29, 2005

The current system of unemployment insurance encourages lay-offs, discourages workers from seeking new jobs and needs to be reformed, according to a new study from the National Center for Policy Analysis (NCPA).

Unemployment insurance shields employers and employees from the true cost of unemployment, says William Conerly, a senior fellow with the NCPA, and author of the study. Fortunately there is a better way -- personal employment accounts.

Intended as a financial safety net for laid-off workers the unemployment insurance system is not fair, according to Conerly:

  • Part-time workers are taxed but often are ineligible for benefits, and employed workers receive no benefit for the taxes they pay unless they file a claim.
  • The system is also wasteful and inefficient; in some states nearly 20 percent of benefit payments are made in error or are fraudulent, and state administrators have no incentive to be efficient.

Conerly also found that unemployment insurance is a powerful disincentive to find a new job, citing abundant evidence that workers respond to the incentives the current system provides:

  • Workers eligible for unemployment insurance remain unemployed longer than those who are ineligible.
  • Workers offered bonuses for rapid re-employment find work much faster than those who are not, and wages at the new job are slightly better than their former pay.
  • The probability of a jobless person finding work rises dramatically the week before the end of their eligibility for unemployment insurance.

Under a system of personal accounts, a portion of payroll taxes would be put in investment accounts that workers own and control. Workers could withdraw the funds during periods of unemployment, and unused funds would add to their retirement incomes. Chile has already successfully implemented such a system.

Source: William Conerly, "Unemployment Insurance in a Free Society," National Center for Policy Analysis, Study No. 274, March 29, 2005.

For text:

http://www.ncpa.org/pub/st274

 

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