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Unemployment Insurance Savings Accounts

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  • Feldstein, Martin
  • Altman, Dan
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    Abstract

    We examine a system of Unemployment Insurance Saving Accounts (UISAs) as an alternative to the traditional unemployment insurance system. Individuals are required to save up to 4 percent of wages in special accounts and to draw unemployment compensation from these accounts instead of taking state unemployment insurance benefits. If the accounts are exhausted, the government lends money to the account. Positive accounts earn the return on commercial paper and negative accounts are charged that rate. Positive UISA balances are converted into retirement income or bequeathed if the individual dies before retirement age. Negative account balances are forgiven at retirement age. Money taken by an unemployed individual from a UISA with a positive balance reduces the individual's personal wealth by an equal amount. In this case, individuals fully internalize the cost of unemployment compensation. UISAs provide the same protection to the unemployed as the current UI system but with less of the adverse incentives. The key empirical question is whether accounts based on a moderate saving rate can finance a significant share of unemployment payments or whether the concentration of unemployment among a relatively small number of individuals implies that the UISA balances would typically be negative, forcing individuals to rely on government benefits with the same adverse effects that characterize the current UI system. To resolve this issue we use the Panel Study on Income Dynamics to simulate the UISA system over a 25 year historic period. Our analysis indicates that almost all individuals have positive UISA balances and therefore remain sensitive to the cost of unemployment compensation. Even among individuals who experience unemployment, most have positive account balances at the end of their unemployment spell. Although about half of the benefit dollars would go to individuals whose accounts are negative at the end of their working life, less than one third of the benefits go to individuals who also have negative account balances when unemployed. These facts suggest a substantial potential improvement in the incentives of the unemployed. The cost to taxpayers of forgiving the negative balances is substantially less than half of the taxpayer cost of the current UI system. Our analysis of the distribution of lifetime UISA payments and taxes of household heads shows the top quintile gaining a small cumulative amount while those in the bottom quintile lose a very small cumulative amount. Other quintiles are small net gainers.

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    File URL: http://dash.harvard.edu/bitstream/handle/1/2960185/feldsteinaltman_unemployment.pdf
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    Bibliographic Info

    Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 2960185.

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    Date of creation: 2007
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    Publication status: Published in Tax Policy and The Economy
    Handle: RePEc:hrv:faseco:2960185

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    1. Winter-Ebmer, Rudolf & Zweimuller, Josef, 1992. "Do They Come Back Again? Job Search, Labour Market Segmentation and State Dependence as Explanations of Repeat Unemployment," Empirical Economics, Springer, Springer, vol. 17(2), pages 273-92.
    2. Bruce D. Meyer & Dan T. Rosenbaum, . "Repeat Use of Unemployment Insurance," IPR working papers, Institute for Policy Resarch at Northwestern University 95-24, Institute for Policy Resarch at Northwestern University.
    3. Katz, Lawrence F. & Meyer, Bruce D., 1990. "The impact of the potential duration of unemployment benefits on the duration of unemployment," Journal of Public Economics, Elsevier, Elsevier, vol. 41(1), pages 45-72, February.
    4. Feldstein, Martin S, 1976. "Temporary Layoffs in the Theory of Unemployment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(5), pages 937-57, October.
    5. David Card & Phillip B. Levine, 1992. "Unemployment Insurance Taxes and the Cyclical and Seasonal Properties of Unemployment," NBER Working Papers, National Bureau of Economic Research, Inc 4030, National Bureau of Economic Research, Inc.
    6. Martin Feldstein & James M. Poterba, 1984. "Unemployment Insurance and Reservation Wages," NBER Working Papers, National Bureau of Economic Research, Inc 1011, National Bureau of Economic Research, Inc.
    7. Moffitt, Robert, 1985. "Unemployment insurance and the distribution of unemployment spells," Journal of Econometrics, Elsevier, Elsevier, vol. 28(1), pages 85-101, April.
    8. Nickell, Stephen & Narendranathan, Wiji & Stern, Jon & Garcia, Jaime, 1989. "The Nature of Unemployment in Britain: Studies of the DHSS Cohort," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198285489, October.
    9. Bruce D. Meyer, 1995. "Lessons from the U.S. Unemployment Insurance Experiments," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 33(1), pages 91-131, March.
    10. Lawrence F. Katz, 1986. "Layoffs, Recall and the Duration of Unemployment," NBER Working Papers, National Bureau of Economic Research, Inc 1825, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Brown, Alessio J. G. & Orszag, Mike & Snower, Dennis J., 2006. "Unemployment Accounts and Employment Incentives," IZA Discussion Papers, Institute for the Study of Labor (IZA) 2105, Institute for the Study of Labor (IZA).
    2. Christian Jaag & Christian Keuschnigg & Mirela Keuschnigg, 2010. "Pension reform, retirement, and life-cycle unemployment," International Tax and Public Finance, Springer, Springer, vol. 17(5), pages 556-585, October.
    3. Keuschnigg, Christian & Fisher, Walter, 2011. "Life-Cycle Unemployment, Retirement and Parametric Pension Reform," Economics Working Paper Series, University of St. Gallen, School of Economics and Political Science 1119, University of St. Gallen, School of Economics and Political Science.
    4. Goerke, Laszlo, 2007. "Unemployment Insurance Savings Accounts and Collective Wage Determination," IZA Discussion Papers, Institute for the Study of Labor (IZA) 3141, Institute for the Study of Labor (IZA).

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