unemployment insurance financing situation - 2008
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Unemployment Insurance Financing Situation - 2008. Dr. Wayne Vroman The Urban Institute [email protected] EARN Conference Presentation December 9, 2008. Pre-recession Reserves: 51 States. The Reserve Ratio Multiple - RRM. RRM - Measure of UI trust fund adequacy Considers three factors - PowerPoint PPT PresentationTRANSCRIPT
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Unemployment Insurance Financing Situation - 2008
Dr. Wayne Vroman
The Urban Institute
[email protected] Conference Presentation
December 9, 2008
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0.0
2.0
4.0
6.0
8.0
10.0
12.0
Mill
ions
Unemployment Regular UI Regular UI + EUC
Chart 1.Unemployment and UI Claimants, 2001 to 2008
Lowest months in 2007 - Aug.-Oct. 3
1 3 5 7 9 11 13 15
Months after lowest three-month average
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
Rat
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o Lo
w A
vera
ge
2008 2001 1991 1980
Chart 2. Monthly Continued Claims: Ratio to Low AverageFour Downturns - Regular UI Program
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Pre-recession Reserves: 51 States
Net Reserves,
Dec. 31
($Bill.)
(1)
Total
Payroll
($Bill.)
(2)
Reserve Ratio =100*(1)/(2)
1989 36.87 1,918 1.92
2000 54.05 3,702 1.46
2007 37.62 4,760 0.79
2007/2000 .732 1.268 .541
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Chart 3. Aggregate UI Reserve Ratio, 1960 to 2007
-1.0
0.0
1.0
2.0
3.0
4.0
Reserve Ratio - Net Reserves as Percent of Payroll, December31
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The Reserve Ratio Multiple - RRM
• RRM - Measure of UI trust fund adequacy• Considers three factors
– (1). Net end-of-year reserves – (2). Scale of state economy (total payroll as proxy)– (3). Potential benefit payouts (highest past 12 month payout rate as
proxy)
• Formula RRM = [(1)/(2)]%/(3)%• Numerator – [(1)/(2)]% - Reserve ratio as a %• Denominator – (3)% - High cost rate as a %• Suggested Solvency Standard - RRM = 1.0• U.S. RRM December 31, 2007 = 0.35• U.S. RRM October 31, 2008 = 0.32
50 states plus D.C. 7
16
1116
2126
3136
4146
51
-0.50
0.00
0.50
1.00
1.50
2.00
Res
erve
Rat
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ultip
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RRM - Oct. 31, 2008
Chart 4. Reserve Ratio Multiples, October 200851 Programs Ranked by Size
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Summary: Large and Small States-2007
Net Reserves
($Bill)
(1)
Payroll
($Bill)
(2)
Reserve Ratio
[(1)/(2)]%
(3)
High Cost
Rate %
(4)
RRM
(3)/(4)
(5)
All States
37.6 4,760 0.79 2.24 0.353
10 Large States
12.6 2,690 0.47 2.48 0.190
10 Small States
2.25 118 1.91 2.99 0.639
Large/
Small
5.2 22.8 0.25 0.83 0.297
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Presence of Indexation in 2008
Indexed Tax Base
Big States All Other States
51 “States”
Max WBA
Indexed
16 5 (CT, IL,
MA, OH, PA)
9 30
Max WBA Not Indexed
1 (AK) 12 8 21
Number of States and Share of
Employment
17
18%
17
67%
17
15%
51
100%
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Tax Base Indexation
• Present in 16 states (out of 51)• Present in just 4 large states (Minnesota, New Jersey,
North Carolina, Washington)• Indexation percentages range from 100 percent of
average statewide wages (Hawaii, Idaho) to 47.5 percent (Oklahoma)
• Indexation associated with high tax bases (simple averages - $24,275 indexed versus $8,971 non-indexed) and high taxable wage proportions
• Indexation associated with high trust fund reserves
UI Financial Data ET Handbook 394 11
UI Tax Bases in 2007
Tax Base Indexed Not Indexed
Above 25,000 6 0
16,000 – 25,000 9 0
10,000 – 15,000 1 9
8,500- 9,500 0 9
8,000 0 8
7,000 0 9
16 35
17 state simple averages 12
Chart 5. Taxable Wage Proportions, 1966 to 2007.
0.20
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
17 Indexed States 17 Big States, Not Indexed U.S. Average
17 state simple averages 13
Chart 6. Reserve Ratios: 17 Indexed States and 17 Large States, 1960 to 2007
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
17 Large States 17 Indexed States
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Indexation and Risk of Borrowing, 1991 and 2001 Recessions
Indexed Tax Base
Big States: Tax Base not
indexed
All Other States
51 “States”
Max WBA
Indexed
N =16
2/32 = 0.062
N =5
4/10=0.400
N = 9
1/18 = 0.056
N = 30
7/60 = 0.117
Max WBA Not Indexed
N =1
0/2 = 0.000
N =12
8/24 = 0.333
N = 8
1/16 = 0.062
N = 21
9/42 = 0.214
No. of States and Risk
Share of Emp.
N = 17
2/34 = 0.058
18%
N = 17
12/34 = 0.353
67%
N = 17
2/34 = 0.058
15%
N = 51
16/102=0.157
100%
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Indexation and Reserve Ratio Multiples – October 2008
RRM – Oct. 31, 2008
Indexed Programs
Non-indexed Programs
51 Programs
Below 0.50 4 27 31
0.50 to 0.99 6 6 12
1.00 and Above
6 2 8
Total 16 35 51
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Indexation of the Maximum Weekly Benefit
• Present in 30 states in 2008• Maximum as a percent of the average weekly wage
ranges from 26 percent to 67 percent in 2007– One state below 30 percent (District of Columbia)
– 14 states from 30.0 to 39.9 percent – 2 indexed
– 16 states from 40.0 to 49.9 percent – 10 indexed
– 12 states from 50.0 to 59.9 percent – 10 indexed
– 8 states from 60 to 66.6 percent – 8 indexed
– Indexation associated with above-average maximum benefits and with above-average benefit replacement rates
17 state simple averages 17
Chart 7. Ratio of Maximum Benefit to Weekly Wage for Three Groups of States, 1966 to 2007
0.35
0.40
0.45
0.50
0.55
0.60
0.65
17 Large States 17 Indexed States Other 17 States
17 state simple averages 18
Chart 8. Replacement Rates for Three Groups of States, 1960 to 2007
0.30
0.33
0.36
0.39
0.42
0.45
17 Large States 17 Indexed States Other 17 States
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Summary
• To date the downturn in the labor market is of unknown severity
• Recession will be more severe than in 1991 or 2001• Aggregate reserve situation of the states is not strong
– A serious recession will cause several states to need loans– Large states have generally low reserve ratios and RRMs– Indexed states have generally high taxable wage
proportions and high reserves• Indexed states generally have higher weekly benefit
maxima and higher benefit replacement rates than other states
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Suggestions to Improve UI Financing - 1
• UI Taxes– Raise and index the federal UI tax base
1. Increase it enough to make half of total payroll taxable, say $20,000
2. Index the federal taxable wage base
3. This will cause many states to raise their state UI tax bases to remain in conformity with federal experience rating requirements
– Increase the oversight of experience rating 1. Oversee state reporting to ensure that all states have at least some
employers at 5.4 percent tax rate or higher
2. Study the growth in employers taxed at the minimum rate
3. Prohibit tax holidays as enacted in Georgia, Kansas and North Carolina in the 1990s
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Suggestions to Improve UI Financing - 2
• Encourage states to build their trust funds1. Pay all states an added 1% on balances between RRM = 0.25 and RRM
= 0.502. Reward states with “large” balances with a bonus interest rate (added
1%) for loans made to other states with low or negative reserves3. Prohibit interest arbitrage when trust fund interest rates exceed the yield
in the private bond market and a state deposits the proceeds of a private loan into its UI trust fund
4. Prohibit “gaming” of cash flow loans through repeated repayments of Treasury loans on Sept. 30th of successive years
5. Do not allow cash flow loans to states with “inadequate” pre-recession trust fund balances