Posted on Thursday, October 21, 2010
With no end in sight to the nation’s high unemployment, the government program to help the jobless is heading for a crash.
And with Democrats and Republicans now divided over what used to be routine extensions of unemployment insurance benefits, there’s little prospect anytime soon for the sort of costly and complex rescue that’s necessary, according to one of the program’s champions.
“I am worried,” said Rep. Jim McDermott (D-Wash.), who got some temporary unemployment fixes in the $787 billion economic stimulus bill. “It is going to take a degree of bipartisanship ... that we haven’t seen.”
The sour economy, with unemployment stuck above 9 percent for a year and a half, has been the backdrop for this fall’s midterm elections, but long-term fixes for the unemployment insurance system have hardly been a hot campaign issue.
Democratic and Republican leaders alike say that helping the unemployed is a top priority. But critics say neither side has done enough to avert the looming insolvency of the outmoded unemployment system, which reaches less than half of the jobless and yet is shuddering under $40 billion in debt.
States, which have already raised employment taxes, will be forced to cut benefits even further next year without the kind of overhaul of unemployment insurance that has always seemed to slip off the congressional agenda, according to McDermott, who’s tried for years to modernize a program that has changed little since it was created in 1935.
A stop-gap measure that allows states to borrow from the federal government interest free expires in January, and the debt will start growing sharply, hitting $65 billion in 2013, according to the Government Accountability Office.
The program, which splits funding with the states, is financed through federal and state taxes paid by both employers and employees. Like other forms of insurance, the idea is that the revenue builds up in the good times and is drawn down in bad. The federal government makes up for any temporary shortfall in a bad recession, with loans to the states that have typically been paid back quickly when surpluses return during economic recoveries.
The problem really started after the 1991 recession, when a “jobless recovery” failed to generate the typical unemployment insurance surpluses, leaving states playing catch-up. Another jobless recovery after the 2001 recession set states back further.Then there was the depth and length of the latest recession — unemployment topped 10 percent and the slump lasted 18 months, the longest since the 1930s. Finally, the 15 months since the recession officially ended in June 2009 have been the worst recovery for jobs since the depths of the Great Depression. As the GAO concluded, the unemployment-insurance funding crisis has been 30 years in the making, and with unemployment expected to top 8 percent until 2013, it’s just going to keep getting worse.
There are three options to save the system, according to Iris Lav, an expert on the program at the left-leaning Center on Budget and Policy Priorities.
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First, the federal government could forgive all, or most, of the debt for states, effectively adding that amount of money to the national debt. But Republicans and many Democrats would oppose such a bailout, she said.
If nothing is done, current law will require the states to either dramatically cut benefits or dramatically increase taxes, at a time when they are facing larger budget crises that are forcing huge cuts and giant tax increases already, Lav said.
The third option would be a combination of the first two, with the federal government forgiving some portion of the debt, increasing taxes and probably cutting some benefits, she said.
Still, it’s going to be very difficult to get Republicans and Democrats together on any compromises, against a backdrop of painful budget cuts ahead and pressure for large tax increases, said Howard Rosen, an expert on aid to the unemployed who’s a visiting fellow at the Peterson Institute for International Economics.
The larger problem, he said, is that the unemployment system is badly outdated and fails to reach a majority of those without work who want it. In many states, benefits have not kept up with inflation, and eligibility rules have narrowed.
Conceived when most families had a single male breadwinner who worked in a factory or another workplace for most of his life, the program does not make allowances for the number of times people change jobs, take temporary jobs, cobble together part-time jobs and relocate, Rosen said.With industries now appearing and disappearing faster than in past decades, the unemployed who must acquire skills and experience in a new industry end up taking pay cuts more than before — and they often have to start over at the bottom.
Rosen is among those who have proposed the idea of wage insurance, making up the shortfall for one or two years while a worker acquires new workplace skills.
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These ideas have been around for years but haven’t moved forward under either Republican or Democratic administrations. Some big supporters of reform assumed high-level jobs in the Obama White House but have not made the issue a top-drawer priority.
Obama administration economic players Larry Summers and Jason Furman and former budget chief Peter Orszag were all top officials for The Hamilton Project, a centrist policy initiative founded in 2006. It advocated radical reforms to unemployment insurance including private accounts and portability, ideas that in a different form were advanced by Republicans to change Social Security.
While many on the left fear that unemployment insurance reform will undermine the program, former Labor Secretary Robert Reich said the program’s growing ineffectiveness means that something must be done.
The current system represents a “massive hole” in the government safety net, he said, and “simply extending the benefits, as we’ve been doing, isn’t enough.”
According to the government’s own surveys, unemployment reaches less than half of the unemployed who lose their jobs involuntarily, because of eligibility requirements that vary widely among the states that set the rules and since there has never been one federal standard.
Costs have always been shared between states and federal government, with the feds on the hook for most costs for workers unemployed beyond 26 weeks, a burden that has become enormous in recent years.
McDermott got a provision in the stimulus bill that was able to entice some states to broaden eligibility of unemployment insurance, but, with the expiration of the bill this year, states could once again start cutting benefits, he said.
A new Republican House after this fall’s midterm elections is not likely to deal with the program’s insolvency nor consider an overhaul that would make it more effective, McDermott said.
And he acknowledged the Obama administration has hasn’t forcefully pushed the issue, either.
Correction: An earlier version of this story omitted the word "billion" in describing the "$787 billion" economic stimulus bill.
By JOHN MAGGS Politico