NCPA - National Center for Policy Analysis


June 24, 2005

The current unemployment insurance system costs little compared to other social insurance programs -- federal and state outlays for the program were $39 billion in 2003. But the current system has a perverse effect on the economy, says economist Martin Feldstein.

In fact, according to several studies:

  • High or extended unemployment benefits can induce individuals not to work; the probability that a person takes a job increases dramatically just weeks before their benefits run out.
  • Furthermore, generous benefits encourage employees to take jobs in firms with seasonal or cyclical layoffs, reducing wages that employers must pay and encouraging the expansion of such businesses.

A possible solution is for everyone to have their own Unemployment Insurance Saving Account, say Feldstein:

  • Individuals would be required to accumulate savings equal to at least six months of their income at 50 percent; the funds would be invested and earn a market rate of return.
  • Anybody would be eligible for unemployment benefits under the current rules; when a person qualifies for unemployment, he or she would simply withdraw money from their Unemployment Insurance Saving Account.
  • Any remaining balance in the unemployment account could be spent when an individual reaches retirement age; additionally, account balances could be passed on to heirs in the event of death.

Furthermore, if individuals are unemployed for a longer period than their accounts will cover, they can borrow money from the government and pay it back once they become employed.

An interest-bearing account would create no distortions, since people know that the quicker they get back to work, the more personal wealth they will accumulate in their account, says Feldstien.

Source: Martin Feldstein, "Rethinking Social Insurance," National Bureau of Economic Research, Working Paper 11250, March 2005.

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