Unemployment Insurance: What a Rip-off

Unemployment Insurance (UI) is a payroll tax, pure and simple.  Just like everything in this category, the people who pay the tax in the end receive very little value for what they pay and it does not even resemble any product that could legally be marketed as insurance by anybody outside of government.  The typical American worker labors between 40 and 45 years, paying into this system the whole time, while his chances of receiving even half of what he paid are slim.

Your employer collects this tax (UI premiums) and sends it to your State and the feds, yet many people think that it is something their employer is simply paying on their behalf.  We see the same effect and confusion in other payroll taxes too and Professor Walter E. Williams explained this in a recent column:

Pretend you are my employer and agree to pay me $50,000 a year, out of which you’re going to send $3,100 to Washington as my share of Social Security tax (6.2 percent of $50,000), as well as $725 for my share of Medicare (1.45 percent of $50,000), a total of $3,825 for the year. To this you must add your half of Social Security and Medicare taxes, which is also $3,825 for the year. Your cost to hire me is $53,825.

If it costs you $53,825 a year to hire me, how much value must I produce for it to be profitable for you to keep me? Is it our agreed salary of $50,000 or $53,825? If you said $53,825, you’d be absolutely right. Then who pays all of the Social Security and Medicare taxes? If you said that I do, you’re right again. The Social Security and Medicare fiction was created because Americans would not be so passive if they knew that the tax they are paying is double what is on their pay stubs — not to mention federal income taxes.

The same applies to UI too, it is a fiction that the employer is the one paying it and it is part of the employees’ total compensation.  The incidence of taxation, as Professor Williams states later, is on the employee.

The Joint Committee on Taxation held that “both the employee’s and employer’s share of the payroll tax is borne by the employee.”

Those who believe that this is simply a benefit the employee does not pay at all cite the Statutory Incidence, where the law assigns the tax.  That is also the same reasoning that gives people the illusion that their employer is paying a portion of their Social Security, Medicare, Obamacare, or anything else along these lines.  The big-word version is: Total compensation equals pecuniary and non-pecuaniary compensation.
UI, as with most government programs labeled insurance, does not really resemble insurance at all.  While the only people who might receive payments are people who paid into it, it fails miserably on premiums having much to do with payouts or risks.
Similarities to the Social Security system abound, and there is good reason for that as they sprang from the same earth, as Dr. Edwin E. Witte outlined in the 1930s in An Historical Account of Unemployment Insurance in The Social Security Act (the official US government version is here).  In the beginning, employers were creating their own voluntary unemployment plans well before legislation was passed.  Witte’s account missed Theodore Roosevelt’s call for UI in his 1912 Progressive Party Platform (Social and Industrial Justice section), and the version we are familiar with today is the offspring of the Franklin D. Roosevelt administration.
If this were simply a tax on businesses to fund a welfare system for the unemployed, there would be no need for accounting down to the individual Social Security number.  It would be some percentage of total payroll, or such.  It resembles no such thing.
No matter where in the US that you work, your employer is reporting your income and sending payments, with your name and Social Security number attached, to the State and IRS.  This is key information, because if you have not worked for 18 of the past 24 months in most States, you are not getting a nickel of that money back.  This is also a key time-period for calculating what you are going to receive too.
Just how much money was it anyway?  On the federal end, it is an easy calculation.  Everybody who had over $7,000 in taxable income on his W-2 was charged $45.00 for the year.  In 40 years of work, that comes to only $1,800.  For those who made less than $7,000/year, the federal payment can be as low as 0.6% of their taxable income.  Note that military members and certain other employees who receive a W-2 are not charged UI, but they may receive payments from some other fund:

There is no payroll deduction from servicemembers’ wages for unemployment insurance protection. Benefits are paid for by the various branches of the military, NOAA or USPHS.

Note also that this is one of the times that the federal government drops the mask and admits that UI is something that is indeed deducted from the employees’ total wages.
On the State and Territory end, it is much more complicated, since there are 53 different versions (the States plus DC, Puerto Rico, and the Virgin Islands).  New Jersey is one of the more honest brokers in reporting to the employee that they are taking money for unemployment insurance, and theirrate is 0.032825 on the first $30,900 of income.  These amounts vary from State to State and are tightly regulated by the feds.  In Professor Williams’ $50,000 annual salary example, that NJ worker would be charged $1014.29 for the year.  So, one would bump up the compensation accounted for here to $54,839.29.
Everybody who receives any unemployment payments from these funds are people who paid for them, even if they did not know they were paying.  So what is the problem now?  Paying all of the people who were promised coverage should not be much of a problem, and it would be less of a problem if the recipient were limited to his lifetime UI taxation.  The case of an employee working only 18 of the past 24 months and never working again in his entire life, and then drawing unemployment for 26 weeks or more is incredibly rare, and the working longevity of the average American is over 40 years today.  The New Jersey example above, in 20 years that worker paid over $20,000 into the NJ system alone.  With interest, any interest, that would be a pretty penny even in today’s dollars.

The amount of unemployment benefits you may receive each week is your WeeklyBenefit Rate (WBR). The amount will be 60% of the average weekly earnings during your base year period, up to a maximum of $624 (in 2013).

In order to make it to that maximum payment, an employee had to earn $54,080/year taxable for the past several years.  Someone who worked for only 36 months, or someone who worked 360 months for the same salary receives the same amount, even though the 36 month worker only paid $3177.87 (including $45/year federal) into UI.  Chances are he will eventually go back to work for a very long time, rarely if ever drawing from the system again.
However, this is a marked difference from what is properly called insurance.  There is no risk calculation at all; the jobs at the most risk of a payout are charged the same premium for the same coverage as the jobs with the least risk.
This is where another problem crops up, and it might be a manifestation of Director’s Law.  The employee who only made $30,900 per year paid the same thing each year as everybody who made $30,901 or $1,000,000.  However, should he become unemployed his weekly payment is not the $624 maximum, it is 60% of his average weekly earnings, or about $357 per week.  Quite the opposite of real insurance, the payout is greater for those who did not pay a thing on a significant portion of their income (the portion above $30,900).
And don’t forget, he must pay income tax on whatever he received.

As we have seen over the past decade or more, the amount of time someone can receive payments, thus the total amount received, can vary greatly.  On the low end it is usually 26 weeks.  On the high end, the current debate is for 99 weeks, the additional 73 weeks paid from federal funds, i.e., that $45/year/employee money, or not since the feds don’t do such a hot job of tying collections to payouts.  Since the feds are only bothering to collect $1800 per lifetime of a worker, shouldn’t they limit their payouts or call it something else?

Has one single politician or pundit bothered mentioning that the amount of money taken from payroll at the State level far exceeds any benefit the employees get from this scheme?  No, at least none I can find.  And good luck finding an accounting for the history of payments versus what it was spent on.

The true fair solution would be to just give it all back and end this folly, along with the unemployment benefits bureaucracy that is using up most of the cash.