INSURANCE

Actuaries define social insurance as a government-sponsored insurance program that is defined by statute, serves a defined population, and is funded through premiums or taxes paid by or on behalf of participants. Participation is either compulsory or the program is heavily enough subsidized that most eligible individuals choose to participate.

Social insurance is any government-sponsored program with the following four characteristics:

• The benefits, eligibility requirements and other aspects of the program are defined by statute.
• Explicit provision is made to account for the income and expenses (often through a trust fund).
• It is funded by taxes or premiums paid by (or on behalf of) participants (although additional sources of funding may be provided as well).
• The program serves a defined population, and participation is either compulsory or the program is heavily enough subsidized that most eligible individuals choose to participate.

Social insurance has also been defined as a program where risks are transferred to and pooled by an organization, often governmental, that is legally required to provide certain benefits.

In the U.S., programs that meet this definition include Social Security, Medicare, the PBGC program, the railroad retirement program and state-sponsored Unemployment Insurance programs.

Typical similarities between social insurance programs and private insurance programs include:

• Wide pooling of risks.
• Specific definitions of the benefits provided.
• Specific definitions of eligibility rules and the amount of coverage provided.
• Specific premium, contribution or tax rates required to meet the expected costs of the system.

Typical differences between private insurance programs and social insurance programs include:

• Equity versus Adequacy.  Private insurance programs are generally designed with greater emphasis on equity between individual purchasers of coverage, while social insurance programs generally place a greater emphasis on the social adequacy of benefits for all participants.
• Voluntary versus Mandatory Participation.  Participation in private insurance programs is often voluntary, and where the purchase of insurance is mandatory, individuals usually have a choice of insurers. Participation in social insurance programs is generally mandatory, and where participation is voluntary, the cost is heavily enough subsidized to ensure essentially universal participation.
• Contractual versus Statutory Rights.  The right to benefits in a private insurance program is contractual, based on an insurance contract. The insurer generally does not have a unilateral right to change or terminate coverage before the end of the contract period (except in such cases as non-payment of premiums). Social insurance programs are not generally based on a contract, but rather on a statute, and the right to benefits is thus statutory rather than contractual. The provisions of the program can be changed if the statute is modified.
• Funding.  Individually purchased private insurance generally must be fully funded. Full funding is a desirable goal for private pension plans as well, but is often not achieved. Social insurance programs are often not fully funded, and some argue that full funding is not economically desirable.

FEDERAL-STATE JOINT PROGRAMS

Wisconsin originated the idea of unemployment insurance (UI) in the U.S. in 1932. In the United States, there are 50 state unemployment insurance programs plus one each in the District of Columbia and Puerto Rico. Through the Social Security Act of 1935, the Federal Government of the United States effectively coerced the individual states into adopting unemployment insurance plans.

Unemployment insurance is a federal-state program jointly financed through federal and state employer payroll taxes (federal and state UI taxes). Generally, employers must pay both state and federal unemployment taxes if:

(1) they pay wages to employees totaling $1500 or more in any quarter of a calendar year;

(2) they had at least one employee during any day of a week during 20 weeks in a calendar year, regardless of whether the weeks were consecutive. However, some state laws differ from the federal law.

To facilitate this program, the U.S. Congress passed the Federal Unemployment Tax Act (FUTA), which authorizes the Internal Revenue Service (IRS) to collect an annual federal employer tax used to fund state workforce agencies. FUTA covers the costs of administering the Unemployment Insurance and Job Service programs in all states. In addition, FUTA pays one-half of the cost of extended unemployment benefits (during periods of high unemployment) and provides for a fund from which states may borrow, if necessary, to pay benefits. As originally established, the states paid the federal government.

The FUTA tax rate was originally three percent of taxable wages collected from employers who employed at least four employees, and employers could deduct up to 90 percent of the amount due if they paid taxes to a state to support a system of unemployment insurance which met Federal standards, but the rules have changed as follows. The FUTA tax rate is now 6.2 percent of taxable wages of employees who meet both the above and following criteria, and the taxable wage base is the first $7,000 paid in wages to each employee during a calendar year. Employers who pay the state unemployment tax on a timely basis receive an offset credit of up to 5.4 percent regardless of the rate of tax they pay their state. Therefore, the net FUTA tax rate is generally 0.8 percent (6.2 percent - 5.4 percent), for a maximum FUTA tax of $56.00 per employee, per year (.008 X $7,000 = $56.00). State law determines individual state unemployment insurance tax rates.

Within the above constraints, the individual states and territories raise their own contributions and run their own programs. The federal government sets broad guidelines for coverage and eligibility, but states vary in how they determine benefits and eligibility.

Federal rules are drawn by the United States Department of Labor, Employment and Training Administration. For most states, the maximum period for receiving benefits is 26 weeks. There is an extended benefit program (authorized through the Social Security Acts) that may be triggered by state economic conditions. Congress has often passed temporary programs to extend benefits during economic recessions. Most recently, this was through the Temporary Extended Unemployment Compensation (TEUC) program. The TEUC program has now expired. The program is not established to provide more than adequate support for unemployed persons for a strictly defined period, and unemployed persons cannot make a profit on Unemployment Benefits.

The federal government lends money to the states for unemployment insurance when the states run short of funds. In general, this can happen when the unemployment rate is high. The need for loans can be exacerbated when a state cuts taxes and increases benefits. All loans must be repaid with interest.

Congressional actions to massively increase penalties for states incurring large debts for unemployment benefits led to state fiscal crises in the 1980s.

Because it is a joint federal/state program run by the states, taxing business for the benefit of labor, the politics of unemployment insurance are very complex.

ECONOMIC FUNCTIONING

The Unemployment Insurance (UI) program helps counter economic fluctuations. When the economy grows, UI program revenue rises through increased tax revenues while UI program spending falls as fewer workers are unemployed. The effect of collecting more taxes than are spent dampens demand in the economy. This also creates a surplus of funds or a "cushion" of available funds for the UI program to draw upon during a recession. In a recession, UI tax revenue falls and UI program spending rises as more workers lose their jobs and receive UC benefits. The increased amount of UI payments to unemployed workers puts additional funds into the economy and dampens the effect of earnings losses.

APPLICATION PROCESS

Generally, the worker must be unemployed through no fault of his/her own (generally through lay-offs). Unemployment benefits are based on reported covered quarterly earnings. The amount of earnings and the number of quarters worked are used to determine the length and value of the unemployment benefit. It generally takes two weeks for benefit payments to begin, the first being a "waiting week", which is not reimbursed, and the second being the time lag between eligibility for the program and the first benefit actually being paid.

To begin a claim, you must apply for benefits (there are a few exceptions where an employer will apply for you). Generally, the certification includes your affirming that you are "able and available for work", the amount of any part-time earnings you may have had and whether you are "actively seeking work" These certifications are usually either by internet or via an IVR (interactive voice response) telephone call, but in a few states may be by mail.Once you apply, the state will notify you whether you have sufficient wages to qualify and what your weekly benefit rate will be. The state will also review the reason you were separated from employment.

To actually receive benefits, you must certify to your eligibility every one or two weeks (this varies by state).

Only after claiming benefits will you receive money. In most states this will be in the form of a check or in a minority of states, optionally, by direct deposit.

CURRENT DATA

Each Thursday, the Department of Labor issues the Unemployment Insurance Weekly Claims Report. Its headline number is the seasonally adjusted estimate for the initial claims for unemployment for the previous week in the United States. This statistic, because of its timeliness, is an important indicator of the health of the labor market, and more broadly, the vigor of the overall economy. Numbers below 300,000 tend to indicate a tightening labor market whereas numbers above 400,000 are associated with increasing unemployment.

TAXATION ISSUE

The argument for taxation of social welfare benefits is that they result in a realized gain for a taxpayer. The argument against taxation is that the benefits are generally less than the federal poverty level.

In the United States, this particular type of payment is unique in the fact that it arises from government resources. As a result, issues arrived over the taxability of such payment. With Revenue Ruling 71-425, the IRS deemed Unemployment Compensation amounts excludable based on certain conditions.

Conditions for exclusion:

• Source of payment is a governmental unit or welfare fund.
• Reason for payment is in the interest of general welfare.

Essentially, nearly identical economic inflows were being taxed differently. In an attempt to provide uniformity and clarity to taxpayers, congress established Code Section 85. Section 85 superseded the previous Revenue Ruling making Unemployment Compensation includable in gross income.

The criteria for inclusion included:

• Recipient must be an individual.
• Source of payment is unemployment compensation.

WORK SHARING

Employers have the option of reducing work hours to part-time for many employees instead of laying off some of them and retaining only full-time workers. Employees in 18 states can then receive unemployment payments for the hours they are no longer working.