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Trooper Sanders

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Reinventing Unemployment Insurance

Posted: 01/30/2012 4:40 pm

Extending unemployment benefits will soon re-enter the gladiator arena of Washington's partisan politics. And what will all of the Sturm und Drang yield for the jobless? An average weekly benefit of less than $300 this year, according to the Congressional Budget Office, which may rise to $387 by 2021. While this keeps many working families out of poverty, it is pin money in today's high cost society. Politicians would better serve the American people by quickly passing the extension and working together to establish a new support system for the nation's long term unemployed.

Except for the independently wealthy, no one is immune from the consequences of economic change. Forces such as greater productivity, technological innovation and globalization, however beneficial generally, are eliminating jobs, flattening wages, and transforming industries for workers rich and poor alike. Many out of work face a long road back to financial stability. In December 2011, nearly 3.9 million people had been out of work for a year or more and still looking for work. Today's measured economic recovery is not an anomaly. According to the McKinsey Global Institute, it took approximately 6 months for employment to recover to pre-recession levels after each postwar recession through the 1980s. This increased to 15 months after the 1990-91 recession and 39 months after the 2001 recession. It could take more than five years for employment to recover from the most recent recession and only under McKinsey's most optimistic scenario does the United States achieve full employment in this decade. The trend of recoveries is coupled with a shift of responsibility for essentials such as health care and retirement savings from employers to individuals. In human terms, many of today's jobless will face years without the stable income they need to survive and get ahead. It may take years to learn new skills and find new, more stable careers. Some may face multiple periods of prolonged unemployment throughout their careers. And long term unemployment creates new expenses such as returning to school, buying individual health insurance and moving to more job-rich communities that must be borne long after savings and government unemployment benefits have run out.

The last era of such turmoil, the Great Depression, beget Social Security and unemployment insurance to provide people with a basic level of income stability in retirement and during unemployment. Since then, our retirement system has evolved into a broad, albeit imperfect, system combining individual savings, government, and private sector services. In comparison, the system supporting the unemployed is threadbare: individual savings are at historic lows, government unemployment insurance looks much the same today as it did during the Roosevelt administration and there are few private income support options available.

As our nation examines the hard-learned lessons of today's economic difficulties, now is the time to bring our unemployment insurance system into the modern age. Building on the current public system for the short term unemployed, a fully scaled, market-driven long term unemployment system would, at minimal cost to taxpayers, provide workers with a new tool to prepare for episodes of prolonged joblessness. To work, this system must reduce adverse selection, ensure products are attractive and affordable to consumers, and discourage idleness.

Whether covering cars against accidents or people against ill health, one of the greatest challenges for insurers is adverse selection: the tendency of people who need coverage the most -- say, the reckless or the sick -- to buy insurance and those who feel they do not need it -- say, the cautious or the healthy -- to forgo it. This concentrates risk and makes it difficult for insurers to offer coverage profitably. That is why scale matters. Having people from all income levels and risk profiles, including independent workers and entrepreneurs who are not covered by public unemployment insurance, buy into the system will make it a more attractive business proposition and improve benefits. If a broad-based private system had existed at the height of the most recent recession, when unemployment tipped the scales at 10 percent, it would have been sustained by the vast majority of people who were working and paying premiums while providing a lifeline to those in need today.

Purchasing private coverage could be made easier through automatic workplace enrollment and access to purchasing cooperatives for independent workers and entrepreneurs. Government can boost uptake by allowing coverage to be purchased with pre-tax dollars, providing tax incentives to employers subsidizing premiums, ensuring coverage is portable, and instituting common sense regulations keeping the insurance industry's products safe, transparent and responsible.

In addition, to reduce incentives for people to stay out of the workforce, benefits could kick in after a reasonable vesting period and initial government benefits have been exhausted. Recipients could also be required to actively seek employment or be in school to continue receiving payouts.

As America's economy goes through another historic transition, tapping the power of the market to help workers avoid financial ruin is not only the right thing, it is the smart thing to do to strengthen American capitalism for all of its people.

Trooper Sanders served as a policy advisor under Michelle Obama, Bill Clinton and Al and Tipper Gore.