Five Questions for Wayne Vroman
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Urban Institute economist Wayne Vroman recommended that Ohio raise unemployment taxes and freeze the maximum weekly jobless benefit to get its unemployment insurance (UI) program back on its feet. Like a number of other states, Ohio’s unemployment trust fund is running out of money. The state will rely on a $550 million federal loan to cover benefits through February. While the recession has hastened insolvency in some UI programs—unemployment claims rising while tax revenue falls—it isn’t the sole cause. Reserves in Ohio and several other states have failed to grow with the economy for years. Vroman answers five questions about his recommendations and applicable lessons for all states. Analysis of UI Benefits in Ohio (Research Report)—Wayne Vroman January 30, 2009 1. What’s behind Ohio’s shortfall in its unemployment insurance trust fund? Ohio’s been operating with a modest-size trust fund for more than two decades. In the past eight years, the balance has dropped steadily, falling by roughly $2 billion from December 2000 to December 2007. Taxes have not kept pace with benefits because they aren’t indexed to wage growth. At the end of 2008, the trust fund had a balance of just $63 million and may need about $1.0 billion to pay unemployment benefits during 2009. Also, the Ohio economy didn’t really recover after the 2001 recession, so the state’s unemployment rate had been consistently above the national average. The recession has made things worse, for Ohio and all states, and it’s been more serious than most people anticipated. Ohio’s unemployment rate in November 2008 was 7.3 percent, or 435,000 jobless workers, compared with a national rate of 6.8 percent. In December 2008, the national unemployment rate jumped up to 7.2 percent—when Ohio’s numbers are released, we’ll see how the state fared in comparison. 2. You were hired by the Ohio Department of Job and Family Services to analyze the unemployment insurance program and suggest ways to keep the trust fund solvent. Can you briefly explain your key recommendations? I recommended increasing the taxable wage base, freezing the maximum weekly benefit for three years, and indexing the tax base to growth in average wages. In Ohio, employers pay unemployment taxes on the first $9,000 paid to each worker. That taxable wage base hasn’t changed since 1995 and it limits the amount of money coming into the state’s UI program. Increasing the tax base by just $1,000 this year would bring in $83 million more in revenue; a $3,000 increase would bring in an additional $250 million. Freezing the maximum weekly benefit would provide some fiscal relief for the trust fund, and increases could be allowed again after three years. Ohio has used this strategy before. It froze the maximum for about four years during the 1980s and then gradually restored the benefit level. Linking the tax base to growth in wages and the economy would be the easiest way to periodically increase the tax base. This practice has helped maintain solvency in the 16 states that have indexed tax bases, but big industrial states have been reluctant to follow suit. The important thing to keep in mind is that Ohio’s financing problem has not been caused by changes in benefits, which have remained basically the same for more than 15 years. And Ohio’s payment levels aren’t much above the national average either. Where the state falls below the national average is in the share of people who collect benefits. Lowering the basic earnings requirement and allowing part-time job seekers to qualify for benefits would open the program up to more people. Adopting work-sharing programs would give employers an alternative to layoffs. Workers could keep their jobs at reduced hours and receive UI benefits to maintain their income. I also recommended eliminating dependent benefits, which would save about 5 percent each year. 3. Are these recommendations applicable to other states’ UI programs? Raising and indexing the tax base make sense in two-thirds of the states. Ohio’s fixed tax base requires special legislation to change. As the economy grows over a long period, the program gets thrown off balance—benefits grow automatically while tax revenues don’t grow as much. The same thing applies to Midwestern states, as I said, as well as to California, New York, Texas, Florida, and others. 4. What lessons do past recessions teach us? And how serious is the situation now compared with past recessions? The trust fund situation is worse now than it was in 2000 before the last recession, and it’s worse than it was in 1989 and 1990. It’s comparable to what it was at the end of the 1970s. On actuarial measures—considering trust fund reserves relative to the total payroll of UI-covered employers—it’s as bad a situation as the UI system as a whole has faced since the late 1970s. Trust funds before this recession weren’t as large. In 2000, for example, the sum of the state trust funds was $54 billion. At the end of 2007, the total was $38 billion. It was smaller in absolute amount, and, because the economy has grown, it’s smaller relative to the size of the economy (1.46 percent of total payroll in 2000 but only 0.80 percent of total payroll before the start of this recession). 5. Some economists say the system is outdated—that the program was created when workers stayed with the same firms for most of their careers and now we have more variety, including part-time workers and people who job hop. Shouldn’t the system be updated or maybe even overhauled to reflect the changing labor market? I don’t think the program is outdated, though many do. There are several things the system as a whole does poorly, but not uniformly poorly across all states. It’s still compensating the same fraction of people that it has in past recessions. There are people in the labor market who don’t get into the system, but the number varies by state. There’s quite a bit of variety in the way individual states structure access to benefits and that shows up in the share of the unemployed who get compensated. In the Northeast and on the West Coast, 40 to 50 percent of the unemployed get compensated. In the deep South and Rocky Mountain states, 20 to 25 percent get compensated. And it’s all within one system. We’re one of only two countries—China is the other—that have a regional-based unemployment insurance program. And one of the deficiencies of that kind of system is that when a region gets into trouble, it has to finance increased benefit payments out of a reduced economic base. There’s no sharing of costs. When Ohio has higher unemployment, it pays more benefits and employers pay higher taxes. Further stressing a state economy that’s already under stress is not a particularly intelligent feature of the system. A national system would allow subsidization from other regions. Because the UI system is financed at the state level, states that get into trouble have to bootstrap themselves out of it. |
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