NCPA - National Center for Policy Analysis


July 30, 2004

The U.S. unemployment insurance system no longer meets the demands of the modern labor force and should be replaced by Individual Unemployment Accounts (IUA), say economists Lawrence Brunner and Stephen Colarelli, writing in the Independent Review.

The authors say traditional unemployment insurance is inefficient and is in need of reform. Some of the problems besetting it include:

  • Benefits are insufficient to cover the costs of extended unemployment, a phenomenon more common in a modern economy as workers often need to be retrained.
  • Women in their childbearing years are 3 times more likely to be out of the workforce than men; as a result, they are less likely to have accrued eligibility for benefits.
  • The structure of the system provides perverse incentives that increase layoffs and prolong unemployment.

IUAs, in contrast, would be a mandatory and portable trust to which the employer and employee contribute. This is how they would work:

  • Individuals would be required to contribute 3 percent of their wage to their account.
  • Employers would contribute an additional 0 to 9 percent depending on how frequently they lay off workers.
  • Individuals would be free to choose how they wish their funds to be invested, whether it be Treasury Bonds, stocks or mutual funds.

Individuals would have the responsibility for how much they withdraw and how they will spend those funds in case of a layoff or retirement. Deposits would not be tax deductible, but money and interest earned would not be taxed when withdrawn (unlike UI benefits).

For all but new employees, the authors say IUAs will provide a substantially better unemployment benefit than the current system. However, first-time entrants who have not worked long enough to accumulate an IUA would be helped by traditional unemployment insurance.

Source: Lawrence Brunner and Stephen M. Colarelli, "Individual Unemployment Accounts," Independent Review, Spring 2004. Independent Institute.


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