Unemployment Insurance: Comments on H.R. 3896, the Unemployment Compensation Reform Act of 1990

Published by the Government Accountability Office on 1990-02-22.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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For Release                   OIBl4PLOYMBtW IUSOBMICB:  Comments on
On Delivery                   HR. 3896, The Unemployment Compensation
Expected    at                Reform Act of 1990
10:00   a.m.     EST
February       22,   1990

                              Statement of Lawrence H. Thompson
                              Assistant Comptroller    General
                              Human Resources Division
                               Before   the
                               Subcommittee    on Human Resources
                               Committee    on Ways and Means
                               House of Representatives

                                 ON H.R. 3896

The Unemployment          Insurance     (UI) System provides         income maintenance
assistance       to the unemployed          using federal     and state      employer    taxes.
The system is based on a forward                  funded principle       under which
reserves     are accumulated         during     economic upturns       to pay benefits
during    periods     of declining        economic activity.         Recent recessions
have exhausted        the reserves        in many state      accounts,      resulting    in
state    borrowing      from federal        UI accounts   to pay benefits.            On
occasion,      the federal       accounts      have needed general        revenue transfers
to cover these loans.
FORWARD FUNDING         PRINCIPLE    HAS BEEN ERODED          Recently,      the increased
reliance       on loans and general       fund advances has eroded the forward
funding      principle.       For nine consecutive        years,    between 1976 and
1984, the UI system operated             with a negative        net balance.        Policy
changes by the Congress            in the 1980s to foster          solvency     expedited
state    loan repayments        but resulted       in increased     UI taxes and reduced
access     to benefits       by the unemployed.         Unless the system becomes
forward      funded,    such a result     can again be expected           if the system
needs significant          loans during     future    recessions.
CURRRNT RESERVES APPEAR INADEQUATE          Even though trust      fund reserves
have increased      substantially   in recent  years,   they still     appear to be
inadequate    to handle a severe recession.        Using a Labor Department
model to simulate       the impact of a severe recession      beginning     in
1991, GAO estimates        that the system would once again require         loans
and general     fund advances to pay benefits.
EFFECTS OF INCREASING THE TAXABLE WAGE BASE An increase                          in the
taxable   wage base is a step in the right                direction       toward restoring
the forward      funding      nature    of the program.         Such a measure would
generate    increased       revenue      for the federal     trust     fund accounts,
likely   eliminating        the need for future         general     fund advances     similar
to those that accompanied              recessions    in the past 20 years.          It would
also increase       state     reserves,      but probably    not enough to avoid
federal   borrowing       in the event of a severe recession.
FUNDING FOR STATE ADHINISTRATION                       While state        administration       of the
UI program was intended               to be federally          funded,       a prior     GAO report
pointed      out that      states     had increased         their     reliance       on their     own
funds to supplement             federal      allocations.         Without      changes to the
state    administrative           funding     mechanism,       future      recessions      could
affect     the states'        ability      to provide       benefits       to the unemployed          in a
timely     and accurate         manner.       H.R. 3896 would provide                the states     with
$3 billion        annually      for administrative            costs.       GAO is uncertain         as to
whether      this    is the right         amount and mechanism for funding
administration,          but endorses          further     exploration        of this     matter.
Mr.     Chairman          and Members of                       the      Subcommittee:
         We are          pleased            to     be here             today        to     assist           you in your
deliberations              on H.R.                3896,        the      Unemployment                      Compensation               Reform
Act     of     1990.       While            the      bill        contains            several               key provisions                   to
revise         the     unemployment                  compensation                   system,               my testimony               will
focus        primarily              on the         proposal             to     increase              the      federal
unemployment              taxable               wage base.               This        proposal               will          increase          the
taxable         wage base             from         the        current          level           of    $7,000           to    $10,000,              in
annual         increments             of        $1,000,          and then            index           it      to     the     growth           in
average         annual          covered            wages         thereafter.                    In        addition,           I will
have      some brief                comments             relating            to     the        provision              to    reform
state         administrative                     financing.
          Before         elaborating                 on these             provisions,                     I would          like      to
provide          some background                     on the            characteristics                       of     the
Unemployment              Insurance                 (UI)       system.

             The UI system                 is     the        federal         government@s                    major         means of
providing             income         maintenance                 assistance                to       the      unemployed.                    The

system's             primary         objectives                are      first,            to    provide             individuals
with         temporary          and partial                   wage replacement                       when they              have          lost
their         jobs,      and second,                    to    assist         in     the        countercyclical
stabilization                  of    the         national            economy             during           economic           downturns
by maintaining                  workers'                purchasing                power.            The UI system                  is
operated             as a partnership                        between         the          federal            government              and the
states.              The federal                 government              levies           a payroll                tax     on employers

to      finance            state         and federal                UI program                administration,                         one-half
of      an extended                benefits            program,             and loans                   to      states         with
insolvent              UI accounts.                    Each state                 operates                its        own UI program,
levying           and collecting                      its     own payroll                    tax        and,         within          certain
limits,           determining                  the     level         of benefits                    and the              conditions                for
benefit           eligibility.                    As a result,                    tax        rates,             benefit         levels,                and
trust          fund        balances            vary         across         states,            reflecting                   variations                  in
program           decisions               and economic                conditions.
           The gross               federal            tax     rate         is     6.2        percent               on the        first
$7,000          paid        in wages             annually            to     each employee.                            However,              if     a
state          meets        certain            federal           requirements                      and has no delinquent
federal           loans,           its      employers               are     eligible                for         up to         a 5.4         percent
credit,           making           the      net       federal         tax         rate        0.8         percent.              To receive
the       maximum federal                      tax      credit        of        5.4      percent,                  states       must
establish              a taxable               wage base             for        state         UI taxes                at      least         equal
to      the     Federal            taxable            wage base--currently                                   $7,000.           All       states
have       done this,                and 36 states                   have         adopted               wage bases               above            the
federally              mandated             level,           ranging             from        $7,100             in     Connecticut                 to
$20,900           in Alaska.
              Currently,             the       net      federal            tax        rate         of        0.8     percent           is        made
up of          a permanent                 tax       rate      of    0.6         percent            and a temporary                         surtax
of      0.2      percent.                The surtax              was added in 1976 to help                                       the        system
repay          loans         from        the      federal           general             fund.                The surtax              was
extended              in     1987 and is                due to            expire         at        the        end of          1990.