AltInst: Unemployment Insurance Savings Accounts

"Unemployment Insurance Savings Accounts"

       BY: MARTIN S. FELDSTEIN
               National Bureau of Economic Research (NBER)
               Harvard University
            DANIEL ALTMAN
               National Bureau of Economic Research (NBER)

Paper ID: National Bureau of Economic Research Working Paper No.
            6860
     Date: December 1998

  Contact: MARTIN S. FELDSTEIN
    Email: Mailto:feldstein@nber.org
   Postal: National Bureau of Economic Research (NBER)
            1050 Massachusetts Avenue
            Cambridge, MA 02138 USA
    Phone: (617)868-3905
      Fax: (617)868-7194
  Co-Auth: DANIEL ALTMAN
    Email: Mailto:altman@nber.org
   Postal: National Bureau of Economic Research (NBER)
            1050 Massachusetts Avenue
            Cambridge, MA 02138 USA

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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 suggests 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.

JEL Classification: H5, J65

Robin Hanson rhanson@gmu.edu http://hanson.gmu.edu
Asst. Prof. Economics, George Mason University
MSN 1D3, Carow Hall, Fairfax VA 22030-4444
703-993-2326 FAX: 703-993-2323

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Received on Wed Nov 22 15:24:26 2000