Federal Fiscal Follies, Part Vb: Unemployment Compensation (Conclusion)

As I wrote previously, one of the questionable programs on which the Federal government spends huge amounts of money is Unemployment Compensation (hereafter UC).  As with many Federal programs, the original intent of UC was good – helping people who’ve lost their job through no fault of their own with some temporary income while they look for another job.  But as is so often the case with Federal good intentions, the road they now pave appears to have forked, and to no longer be the road we ought to travel.

So let’s look at some of the details of today’s UC programs.  It’s rather complex, and hopefully I can give an overview of the current mis-mash of such programs – as well as point out some of the issues with them.

I.  Overview

Federal involvement in Unemployment Compensation started during Great Depression – just like food stamps and Social Security.  The program was first authorized by the Social Security Act of 1935; four years later, enabling legislation – the Federal Unemployment Tax Act, or FUTA, formalized the program and completed its structure.  Yeah, this is yet another “good deal for America” you can thank FDR for starting.

A detailed overview of the current US UC system is given in CRS Report RL33362, published roughly two weeks ago; much of the information in this section comes from this and the prior link.

Virtually all employment in the US is now covered by UC.  The employment currently exempted is self-employment (including sole proprietorships), plus certain agricultural labor and domestic work; work for relatives; work performed by patients in hospitals; selected student interns; selected alien farmworkers; selected seasonal camp workers; and railroad workers (who have their own unemployment program).  It’s estimated that 97% of workers in the US are covered under state UC programs, provided they have sufficient income and service.

In simplest terms, the FUTA and Social Security Acts set up a program that currently imposes a 6% Federal payroll tax (current rate) on the first $7,000 of employee income, and provide guideline for qualifying state UC programs.  This tax is paid by employers – employees do not and never have paid a cent out of pocket.  However, 5.4% of this Federal tax is waived if the state in which work is performed has a qualifying UC program; this reduces the effective FUTA rate 0.6%.  All 53 “state” programs currently in existence (DC, the US Virgin Islands, and Puerto Rico are treated as state programs for UC purposes).  The net result is that the Federal tax component for UC is capped at $42 per employee per year – e.g., 0.6% of $7,000.  This is used to pay for program administration costs and to help defray the cost of UC for a number of relatively small Federal UC programs (more about these later).

As mentioned above, all US states plus DC, the USVI, and Puerto Rico have qualifying “state” UC programs.  These programs impose payroll taxes on employers as well (again, these taxes are imposed on employers only; employees pay nothing).  Recepits for these taxes are used to pay benefits for basic UC (more on the rather bewildering array of types of UC programs later in this article). However, Federal law allows states great leeway in running their own program – so employer tax rates, the amount of employee income subject to taxation, and the amount of weekly UC benefits paid vary widely from state to state.

Most states take employer history into account when setting state unemployment payroll tax rates.  That is, employers with low employee turnover pay low rates, while those with high “chargable” turnover (essentially, anything except voluntary departures or firing for “sufficient cause”) receive higher rates.  Rates range from literally nothing (0%) for “good” employers (multiple states) to 13.5% for “bad” employers (Maryland).  New employers generally get assessed an initial, average rate.

The amount of income subject to taxation also varies, from the first $7,000 of each employee’s wages (minimum allowable) in California and Puerto Rico to the first $38,800 of each employee’s wages (Hawaii).  Thus an employer may thus pay literally anywhere between $0 per employee (several states) and $3,043.60 (MN) per employee in state unemployment payroll taxes in addition to Federal FUTA taxes.

Federal and state unemployment payroll taxes go to unemployment trust funds managed by the US Treasury on the behalf of the states.  Deposits to these funds are counted as income for the Federal government when received, and payments from the funds are counted as Federal outlays.  State funds are used to pay for state UC costs; Federal funds pay for program administration and a few smallish Federal UC programs, most notably for former Federal employees (civilian and military) who are eligible for UC based on leaving Federal employment.  States may “overdraw” their accounts by borrowing funds from the Federal government during times of economic hardship.  Such borrowing is by law to be repaid with interest, but currently interest payments are suspended.

UC benefits vary widely from state to state.  The actual amount received is loosely based on salary history during the “base period” for calculation of UC benefits, but is capped at a maximum value which varies by state.  Basic UC ranges from a low-end minimum of $5/week in Hawaii for a low-income unemployed former worker with no dependents to a maximum of $653/week for a high-income unemployed former worker with no dependents in Massachusetts.  Some states increase benefits paid based on having dependents; some don’t.  The maximum benefit nationwide for a high income unemployed former worker with maximum dependents is also in Massachusetts and is $979/week.  This is the equivalent of a job paying more than $50,000 a year, or of work at roughly $24.40 an hour.

Although Massachusettes is the most generous UC state in terms of maximum possible benefits, it’s not alone in being relatively generous with maximum UC benefits.  Nearly half of US states and territories (26/53) pay max UC for unemployed former workers without dependents at a weekly rate of over $1,600 monthly, and 15 pay max UC at a weekly rate equating to over $2,000/mo – or roughly the equivalent of $12/hour work.

A person qualifies for UC by working a specified amount of time and/or earning a specified amount during what is called the “base period”.  Most states use the first 4 of the previous 5 completed calendar quarters as their base period; however, states are allowed to use alternate periods, and some states do. States also require one to have substantial earnings within each quarter during the base period, to work a certain number of hours during each quarter, or both in order to be eligible for UC.  Specific qualifications vary widely from state to state.  In general, one qualifies under the rules of work location vice state of current residence.  I believe ex-military generally qualify under the rules for their Home of Record, but I may be in error on this point.  Relocation after losing a job doesn’t change this.

II.  The Various UC programs

There are several different UC programs currently in effect or which have just recently ended.  A detailed overview is provided in the CRS Report cited above.  However, here is the “short version” concerning each.

Basic UC.  Basic UC is paid by state-run UC programs.  Benefits are paid with receipts from state unemployment payroll taxes.  Technically, payments are from state unemployment trust fund accounts managed by the US Treasury on behalf of the states; these accounts are funded by deposits of state payroll taxes or by borrowing from the Federal government if/when exhausted.  The duration of these programs are generally 26 weeks; a few states have shorter durations, while 2 states pay basic UC benefits for a bit longer (28 and 30 weeks in MT and MA, respectively).  The only cost to the Federal government for these programs is the cost of program administration.  When exhausted, the benefits determined here are currently continued in one of two other Federal UC programs:  EUB08 and EB.

EUB08.  Since 2008, the Federal government has also authorized Extended Unemployment Benefits (EUB08) to be paid (EUB were also authorized under various other expired extended unemployment benefits programs in the past, so the acronym EUB08 is generally used to refer to the current program).  EUB08 is paid for by the Federal government.   Current legislation allows this program to extend benefits from week 27 to as long as week 79 of continuous UC, depending on local economic conditions.  This program has been modified repeatedly by Congress, and is currently set to expire at the end of 2012.

EB.  A Federal Extended Benefits (EB) program is also authorized.  This program is also tied to local economic conditions.  Cost for this program is theoretically split 50/50 by state and Federal governments.  However, currently the requirement for state 50% contribution is suspended, so at present the Federal government is paying 100% of the cost of the EB program.  The EB program provides a 13 to 20 week extension of UC benefits.

FAC.  Federal Additional Compensation (FAC) was a Federal UC program begun under PL 111-5 and which expired on May 29, 2010.  It added additional $25/week to all UC payments received which began prior to it’s sunset.  It was last paid in 2011 to those qualifying before its expiration date, and is no longer paid.  However, during its lifetime it paid approximately $20.1 billion in additional UC to those already receiving UC benefits.

Other UC Programs.  UCX, is a program that pays for UC  for ex-military personnel who ETS.  UCFE is a program that pays for UC for Federal employees who are laid off involuntarily.  Disaster Unemployment Assistance, or DUA, is a program that provides UC to persons affected by major disasters who would not otherwise qualify for UC.  UC benefits are also paid to a relative handful of former workers under the Trade Adjustment Act or Readjustment Trade Assistance Adjustment program also exist.  All of these programs are Federally-funded, and are relatively minor in scope.

Railroad workers also have a separate UC program; however, that program is completely separate from other UC programs and is not discussed here.

Sorting through all of the above, current eligibility for continuous UC benefits under all programs can last up to 99 weeks, or nearly 2 years, in areas of high unemployment.  This total may be extended further if Congress decides to do so.  However, absent Congressional action the EUB08 program will expire at the end of 2012, significantly reducing the duration of UC available.

UC benefits are considered fully taxable for Federal tax purposes, except for the year 2009.  During that year only, first $2,400 in annual benefits were exempted from Federal taxation.  I don’t know precisely how UC is treated for state taxes (and I don’t have time to research all 53 different programs), but since it’s Federally taxable I’d guess most states also regard UC as taxable income.

III.  The Numbers

UC Costs.

Most people have no idea how much the Federal and state governments pay in UC.  From 2008 to present, the cost has greatly exceed the cost of the Federal food stamps program.

For 2010, total amount spent to administer the UC program, including benefits paid, was $156.3 billion.  Although this is the most recent “worst-case” in terms of costs, it’s also illustrative of what can be expected under similar programs in the future during bad economic times.

Revenues from unemployment taxes (Federal and state) were $44.7 billion.  All taxes and UC expenses go through Federal unemployment accounts and show up on the Federal budget as incomes and expenditures.  Therefore, the net “hit” to the Federal budget for UC during 2010 was $111.6 billion.

In 2010, UC program costs were broken down as follows:

(a)  A total of $5.5 billion was spent in administrative costs, or about 3.5% of the total.  For a program of this size spread over 53 states and territories, that’s not too bad.

(b)  Of the outlays, standard UC benefits – of which states still are responsible for 100% of the cost – were paid totaling $63.0 billion.  The benefits paid came from state unemployment trust fund accounts maintained by the Treasury to receive unemployment payroll tax revenues and reimburse states for their portions of UC payments.  Since these exceeded the total revenue from state UC taxes by $24.7 billion, that means states borrowed nearly $25 billion from the Federal government to pay UC benefits.  The Federal government thus paid out nearly 80% of the total cost of UC benefits paid during 2010 – though it theoretically will eventually get $25 billion back when the states pay back what they borrowed.  However, that will be with little or no interest; interest payments are currently suspended.

(c)  EUC08 UC payments (only paid to those who’ve been out of work long enough to exhaust their normal UC benefits) in 2010 totaled $72.1 billion.

(d)  EC payments (paid to those who’ve exhausted both normal UC and EUC08 benefits) in 2010 totaled $8.0 billion

(e)  Payments under the now-expired FAC program in 2010 totaled $11.7 billion during the first part of 2010 (program ended 29 May 2010, but people drawing FAC on that date continued to draw FAC until their UC benefits under all programs were exhausted).

(f) UFE/UCX ($1.3 billion) and Trade programs (TAA/RTAA, $0.2 billion) complete the picture.  No DUA UC was paid in 2010, and none appears to have been paid since DUA authority for Hurricane Katrina ended.

How Many Recipients?

While data probably exists, I didn’t find a good source of precisely how many people by year received UC.  So I decided to do a bit of ballpark estimation to determine a lower bound on that number.

That number turns out to be  pretty big.

2010 was the “high water mark” for recent UC.  That year, a large number of persons received UC.  The weekly average appears to have been at least 9 million individuals receiving UC.  While persons might move from one UC program to another during the year (and thus be counted more than once), many more received basic UC for only part of the year.  Therefore,  it appears likely that the 9.0 million per week average is an under-estimate, and that more individuals received benefits on average each week than that during 2010.

(a)  Basic UC.  In July 2012, the average duration of basic UC was 17.4 weeks – roughly 1/3 of a calendar year – and the average benefit (nationwide) was $299/week.  Using these numbers for 2010 (they are assumed to be relatively close to comparable numbers from 2010) yields a total number of persons receiving standard UC of approximately 12.16 million individuals.  However, even if 26 weeks of basic UC is assumed for everyone, this still equates to approximately 8.1 million individuals receiving basic UC during 2010.

(b)  EUC08, paid to those who’ve exhausted basic UC benefits, yields a weekly average of approx 4.64 million individuals receiving EUC08 benefits.

(c)  EB, paid to those who’ve exhausted both basic UC and EUC08, was paid to a weekly average of approximately 510,000 persons.

(d)  FAC, paid to anyone who started drawing UC prior to 29 May 2010, was paid to a weekly average 9.0 million.  This provides a lower bound on the average number of persons receiving UC weekly in the USA, as anyone who qualified for UC on/after 31 May 2010 would not receive FAC.

(e)  UCX/UCFE (83,000 weekly average) and TAA/RTAA (11,000 weekly average) complete the picture.  No DUA appears to have been paid during 2010.

The average number for persons receiving UC weekly in 2010 thus very likely was in excess of 9,000,000 individuals.

IV.  UC Myths, Realities, and Inanities

Well, why is all this so bad?  Because it’s often administered under nonsensical state rules and subject to abuse.  Let’s look at some of the common myths and inanities regarding UC.

a.  “UC is insurance!”  No, it is not.  UC is a payroll-tax funded income-transfer payment received from the government because it’s an entitlement someone qualified to receive.  The income to be transferred comes from either employers or Federal taxpayers; it goes to the recently unemployed.  The qualifications are (1) that an individual worked a set amount of time and/or had a minimum amount of earnings, and (2) that their employer – not the individual – paid unemployment taxes based on their employment history and the fact that the individual was working.  There is no insurance policy or individual “unemployment insurance” account; no one paid premiums (taxes are not premiums); you had no option of declining coverage; and you have no contractual right to any payments.  Unemployment taxes go into a common pool; benefits are paid from that pool based on a formula defined by law.  If the state wants to terminate or change the program tomorrow, they can elect do so by changing state law.  Recipients have no recourse if that happens.

b. “I paid for it!”  If you are an employee – no, you didn’t.  Your employer paid for it.  UC is financed through payroll taxes paid by your employer – not by you.  You didn’t pay a dime.  And your employer also got to deduct those payroll taxes from gross income as a cost of doing business, thereby lowering the employer’s overall taxes paid to both Federal and state on any profits made.

c.  “It’s a Federal program!”  Yes and no.  Technically, the Federal government runs a program and sets guidelines, and collects a small (0.6% of the first $7000 in wages per employee, or a maximum of $42 per employee per year).  This Federal tax is used to set up a “fund of last resort” and to pay program administration costs.  However, Federal law only encourages states to participate in a qualifying program and established broad guidelines; it doesn’t prescribe much in the way of specifics. And the guidelines under the Federal program are very broad, and give much latitude to the states as to what they can do.  All 53 “state” UC programs have been found to be qualifying programs.  But there are no uniform qualifications.  As noted above, qualifications vary from state to state.

d.  “You’re not eligible to get UC if you’re fired.”  The correct answer is – that depends.  States have great leeway in interpreting this point.  Someone fired because of criminal activity, a pattern of significant violations of company policy, conduct that is against his employer’s interests, or other serious misconduct probably will be ruled ineligible by their state.  But someone who is fired for poor performance, inability to do the job probably, a history of tardiness, inability to adapt to a changed job, etc . . . . , will be eligible for UC in many if not most states.  Being fired is not an automatic bar from receipt of UC. And when it’s a bar, it’s often only a temporary disqualification.

e.  “You’re not eligible if you voluntarily quit your job.”  Not true.  The correct answer is that you might or might not be.  Here, states also have great latitude.  Someone who merely quits because they don’t like their job or their boss probably will be determined to have left voluntarily and won’t be eligible; ditto for someone who voluntarily retires.  But someone who quits for other reasons – like health, need to care for an ill relative, a major change in working conditions, or is deemed to have suffered a “constructive termination” (essentially, they left under conditions that forced them to leave) or due to domestic violence-related issues may well be eligible for UC even if they voluntarily quit.  And in many states if you quit one job with “reasonable expectation of employment elsewhere” and that new job falls through – you’re eligible.  In fact, since 1991 ex-military get a huge break here since by Federal law voluntary ETS is no longer considered voluntary job departure (some states did prior to 1991).

f.  “You’re not eligible if you’re a student.”  Not necessarily the case. Many states allow students to receive UC.  Several do so without significant restriction.

g.  “You’re not eligible if you’re retired.”  Again:  not necessarily the case.  Most states allow Social Security recipients to receive UC.  And in over half the states, receipt of a pension in general only disqualifies you from receipt of UC if that pension is based on work occurring in whole or in part during the base period.  In those states, a pension is not considered  with respect to UC claims if those claims are based on losing subsequent post-retirement employment with another employer.

h.  “You have to take any job offered – if you don’t, you lose your benefits.”  This is absolute bull.  At least initially, an out-of-work employee is required to take only “suitable employment” when offered; employment considered “unsuitable” may be refused without loss of UC benefits.  Individual states determine what is and is not “suitable employment” for people receiving UC.  And some of the definitions of what may be turned down as “unsuitable employment” are absolutely asinine.

Here are some examples of truly IMO asinine stuff regarding the definitions of “suitable employment” and UC benefits.

Example 1:  A guy or gal in Michigan is a plant manager for a large manufacturing company and is earning $140,000 a year plus benefits.  After 5 years employment, the plant closes – and they’re out of work.  After collecting UC for 8 weeks, the individual is offered an identical position in the same business by a smaller company, managing a much smaller but otherwise similar plant – at $97,500 a year plus comparable benefits.  The commute is considerably shorter than to his former job.  The individual turns the offer down, and the job is filled the same day by the #2 candidate.

Boy, what a dumbass!  Just lost UC benefits for declining suitable work, right?

Wrong.  In Michigan, during the first half (10 weeks, since Michigan only provides 20 weeks of basic UC benefits) of your basic UC benefits, you don’t have to accept a job paying less than 70% of what you previously made.  During that period, any job paying less than 70% of your former salary is not considered “suitable employment”.  However, had the offer occurred 3 or 4 weeks later – e.g., during week 11 or 12 of receiving UC – the offer would have been considered suitable employment (rules change at the half-way point).  Declining the offer at 11 or 12 weeks would indeed cost the individual UC eligibility.

Makes a lot of sense, eh?

Example 2:   A guy or gal in Massachusetts works as a research chemist  for a “green” company developing environmentally-friendly pest control products at a salary of $150,000 a year.  The employer goes belly-up, and the individual is out of work for 13 weeks and draws $653/week in UC (I’m assuming $150k a year qualifies for max UC in MA).  The individual is offered a similar job (developing pesticides) with a chemical company at exactly their old salary.  Benefits are comparable and the job is a 10 min walk from home.  They turn the offer down.  They just screwed up and blew their receipt of UC, right?

Wrong.  Massachusetts allows declining otherwise-qualifying work for “ecological objections” without loss of UC benefits.

Example 3:  The next week, the same person in Massachusetts is offered a job developing effective environmentally- and human-friendly pesticide products for use on military uniforms at Natick Labs as a SME at $150,000 a year.  The individual turns that down, too.  Just screwed the pooch, right?

No.  Turning down what would otherwise be suitable employment because it’s defense-related is also allowable in MA.  You retain your entitlement to UC in that case.

Example 4:  Two weeks later, the same person in MA is offered a job working for an eco-friendly company doing the exact same thing they were previously employed doing.  The prospective employer has no DoD connections whatsoever.  But it’s a 30 min drive away in the countryside, and would require driving to work 30 min each way vice taking the bus, riding a bicycle, or warlking (no public transport is available to the new job’s location, and it’s too far to bike or walk).  The last job was a 1 hour bus ride away from home. The individual turns it down.  They screwed up and lost their UC, right?

No.  MA also allows refusing a job without loss of UC benefits if the worker previously used public transportation to get to/from work and public transportation is not available to/from the new job site.

i.  “Rich folks can’t get unemployment – it’s only for poor working stiffs.”  One can argue the merits of whether or not UC should be means or assets tested, like Medicaid.  However, currently UC is not means tested whatsoever. And as my first article on UC noted,  2,362 persons living in households having a taxable income of $1M or more received UC in 2009.

i.  “UC is  something I earned while working!”  Actually – no, you didn’t.  Unlike a pension or other type of defined-benefit retirement, UC is not a deferred compensation payment earned through service with an employer.  Rather, UC is a tax-funded, state-run public assistance program.  Like any other public assistance program, a recipient qualifies simply by meeting statutory qualifications.  In the case of UC, those qualifications are generally earning a specified amount of money and/or working a given number of hours during a specified period of time while working for a qualifying employer.  If you meet the statutory qualifications, you qualify.  Period.

V.  Conclusion.

Perhaps UC was indeed set up for “good intentions”.  But it’s morphed significantly between 1939 and today.  And I’m not sure the road those good intentions pave today is exactly leading where we really want to go as a nation any longer.

Helping people for a short period when they lost their job through no fault of their own is one thing.  However, IMO paying people UC for nearly 2 years – in rare cases, at the rate equivalent to that of a $50k a year job – seems way out of line and inconsistent with a free-market economy.

Category: Economy