Saving for a Rainy Day?
Tuesday, July 5, 2011 at 9:52 PM by Tamarine Cornelius
Most of us try to save a little while times are good, stashing away extra funds in case we’re stuck without a job or with extra expenses. In the best cases, this allows us to survive on our savings rather than charging the credit card or falling into poverty. Unfortunately, the state has not chosen to do the same on an important program currently supporting more than 90,000 Wisconsinites – unemployment insurance.
The Wisconsin Legislative Audit Bureau recently released a report on the state unemployment insurance (UI) reserve fund that pays benefits to jobless workers. This UI fund is financed with a payroll tax on employers.
The audit report highlights a dramatic draw-down of the fund over a ten-year period, from $1.9 billion available for unemployment benefits in 2000, to a deficit of $920 million in 2010. Wisconsin has been borrowing from the federal government to pay for benefits since the fund went into the red. As a result, our state currently owes the federal government $1.4 billion, along with more than $25 million in interest.
The Audit Bureau report reveals a troubling trend in the fund’s financial status. Throughout the 2001-03 recession, the fund provided more in benefits than it took in from employer taxes. This is typical in a recession, as increased joblessness leads to both an increase in benefit claims and a decrease in total payroll, the basis for the tax on employers that finances the fund.
However, as the decade continued and the economy improved, the fund still was giving out more in benefits than it was taking in from employer payroll taxes. Under the traditional model of unemployment fund financing, a period of economic growth is supposed to bolster the fund, preparing it for the next recession. Instead, the fund balance continued to decrease through a period of economic growth, leaving it unprepared for the severe recession that brought Wisconsin unemployment levels up to 9.2% in 2009-10.
Wisconsin workers and employers alike suffer when the unemployment fund runs a deficit. Perhaps motivated by the current fund deficit, the Governor recently signed into law a provision that would require the unemployed to wait for one week after losing their job before receiving benefits, reducing overall costs for the program. On the employer side, the Wisconsin Department of Workforce Development recently notified businesses of an impending special assessment to start paying down the interest on the state’s federal loan.
Wisconsin is not alone in unemployment reserve fund deficits and in borrowing from the federal government to pay for unemployment benefits. As of April 2011, 31 states were borrowing from the federal government to pay unemployment benefits. Of those, Wisconsin and 22 other states had taxable wage bases – the portion of a worker’s payroll subject to the employer tax that funds unemployment benefits – lower than $15,000.
Wisconsin’s wage base was set at $10,500 from 1986 to 2008, with increases starting in 2009. The state’s current taxable wage base of $13,000 is roughly in the middle of the pack of all states, and it will increase to $14,000 in 2013.
A number of states index their taxable wage base to increase at the same rate as average wages as a way to prevent the gradual erosion of their unemployment reserve fund, ensuring that the state’s unemployment fund will continue to operate effectively as workers’ wages and demands on the fund grow. Had Wisconsin’s wage base increased at the same rate as per capita income from 1986 to 2010, the wage base at the end of that period would’ve been $17,477, rather than the $12,000 that it actually was.
Providing for indexing of the wage base is one option that policy makers can consider as they look for ways to ensure the reserve fund’s solvency going forward.