Q02 Q02 Q02
would personal Savings accounts reduce the rate of unemployment?
Under the current unemployment insurance system, workers and their employers are required to pay taxes on wages and salaries, which are used to finance benefits for unemployed workers covered by the program. Typically, the benefits replace about 50 percent of a worker's prior pretax earnings for up to 26 weeks. During several recessions, Congress has extended the benefits for an additional 13 weeks. Moreover, during the recession and sluggish recovery from the 2008-2009 recession, the benefits were extended to up to 99 weeks. In many European countries, the unemployment benefits are even higher than in the United States, and people are sometimes permitted to continue drawing benefits for two or three years.
Unfortunately, unemployment programs have an unintended secondary effect: They increase the unemployment rate. The benefits make it less costly for an unemployed worker to turn down available jobs and continue searching while receiving the payments. They also reduce the incentive of the unemployed to switch occupations or move to another location in order to find employment. As a result, workers stay unemployed longer and the overall unemployment rate is higher than it would be otherwise. In fact, empirical evidence indicates that there is a spike in the number of unemployed workers obtaining employment just prior to and immediately after their unemployment benefits are exhausted. The persistently higher unemployment rates in Europe, where the benefits are more generous, also indicate that the program pushes the unemployment rate upward, perhaps by as much as 2 or 3 percentage points.
To deal with this problem, Lawrence Brunner and Stephen Colarelli have proposed that a system of personal savings accounts be substituted for the current system. Instead of paying a payroll tax, employees and their employers would make equivalent payments into an unemployment personal savings account owned by the employee. Workers could then access the funds in their accounts during periods of unemployment. Upon retirement, any funds remaining in the account would be available to the worker, and, in case of death, unused funds would be passed along to the worker's heirs. Because this system would mean that workers would be using their own funds rather than the government's during periods of unemployment, the approach would eliminate the perverse incentive structure generated by the current system.
Question for Thought
Would the proposed reform increase the incentive to search for and accept employment rather than undergo lengthy periods of unemployment? Why or why not? Can you think of problems this system would create compared with the current system?