Critically Underfunded Unemployment Insurance Plans

Eighteen states have critically underfunded unemployment insurance plans. This issue has yet to come to a head, but it soon will.

Please consider Unemployment Insurance Buckles After Years of Underfunding.

[Eighteen via latest updates] states have simply run out of money to pay benefits and been forced to borrow from Washington a total of more than $8 billion. That number is almost certain to grow as more states reach the brink. If they are not able to pay that amount back before 2011, which most will not be able to do, they face paying hundreds of millions of dollars in interest.

Meanwhile, many workers are struggling to get by on what the system pays them. Where you live can make all the difference -- workers in the most generous states get twice the average benefits of workers in the stingiest ones. The percentage of unemployed workers who even receive benefits varies greatly by state.

Unemployment insurance is also intended to be automatic stimulus during a recession, keeping people spending and businesses open.

"The idea is you accumulate reserves and then you can support spending when the economy goes south," said Gary Burtless [3], an economist at the Brookings Institution.

But many states have failed to do that, and they're now paying the price. Indiana, which ran out of reserves last year, just raised its unemployment taxes by 35 percent, right in the middle of a deep recession when businesses can least afford it.

Many have been maintaining close to zero reserves [4] for years, well before the economy headed south. California, for example, got into trouble by raising benefits without increasing taxes. Other states, like Michigan, lowered taxes to unsustainable levels and watched their reserves dwindle.

Now, these states will be forced to raise taxes or cut benefits in the middle of a recession -- just when those changes will do the most economic damage.

On average, workers who rely on unemployment insurance get about half as much as they earned while they were working. In some states it is much less, and it may get lower as policymakers struggle to keep their unemployment insurance systems afloat.

There are also wide variations in the percentage of unemployed workers who collect benefits. Nationwide, only about 30 percent of workers who lose their job ever see an unemployment check, but in some states it is as high as 80 percent. Some of the variation is due to differences in who is allowed to collect benefits, some is because many workers -- particularly in states where unemployment insurance is considered a welfare program -- never apply.

Is Your State Flat Broke?

States are free to choose the level of funding for their systems. Over time, many states yielded to political pressure to increase benefits and lower taxes, allowing their reserves to dwindle. Now, 17 states have run out of money altogether, forcing them to borrow money and increase taxes at the worst possible time: in the middle of a deep recession.


Click here for an Interactive Map of State Unemployment Woes

That is an excellent article by Pro Publica outlining the problems. Inquiring minds will want to click on the interactive map link as well as the link to the original article. There is much more to see.

Those 18 problem states constitute an enormous percentage of the population of the United States. New York is $1.3 billion in the hole, Indiana is $1 billion in the hole, and California alone is over $3 billion in the red. Is that factored into the California budget?

On a per capita basis, Indiana is in the worst shape by far.

Who Is To Blame?

It's easy to blame states for woefully underfunding unemployment insurance funds. However, that is not the origin of the problem.

A big share of the blame must go to politicians for making promises that cannot be met. However, let's not forget all the people irresponsibly living on the edge all along.

34 Percent of Workers Have One Week or Less of Savings

Did it occur to any individuals to live within their means and to have actual savings in the bank in case they lost their jobs? The answer is "no, not many".

Please consider 34 Percent of Workers Have One Week or Less of Savings.

Over a one week period beginning July 6 and running through July 13, more than 16,000 visitors to Monster.com participated in the Monster Meter Poll question ?If you were laid off without severance, how long would your savings cover your living expenses??

• One Week or Less: 34%
  
• 2-4 Weeks: 16%
  
• 1-2 Months: 16%
  
• 3-5 Months: 14%
  
• 6 Months or Longer: 20%

Creating three broad groups, 50% have less than a month of savings, while only 20% have 6 months or more. The remaining 30% are in between. Although the Monster Poll is not scientific, I cannot help thinking it is reasonably accurate.

Role of the Fed and Congress

One must also not forget the role of the Fed in this mess. The Fed, via debasement of the US dollar, fostered an economic environment environment that outright encouraged people to borrow more money than they could possibly pay back. Those same policies, plus the moral hazard of too big to fail, encouraged banks to take ridiculous risks, which of course they did.

Finally one must take into consideration the role of Congress and the Bush Administration for misguided policies promoting housing. The result was a Collapse Of The "Ownership Society".

In the wake of that collapse, the Obama Administration has shifted priorities towards renting.

Although there is plenty of blame to share, the root cause can be traced back to Fed policies and fractional reserve lending, both of which acted in unison to encourage irresponsible lending by banks and irresponsible borrowing by consumers.

Sadly, I have no doubt that the political "solution" will be higher unemployment insurance taxes, just as happened in Indiana. Such measures cannot help but cost jobs. Add up all the things that cost jobs while debasing the dollar and you will see policies that collectively encourage outsourcing to India and China.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
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