New Report Identifies Flaws in Unemployment Insurance Fund; Proposes Commonsense Fixes
California Labor Federation Calls for Overhaul to Put Fund on Path to Solvency
SACRAMENTO — The California Labor Federation today released a report identifying structural flaws in the Unemployment Insurance (UI) Fund that put at risk a lifeline for laid-off workers. The report, “Unemployment Insurance: Underfunded and Undervalued,” calls for immediate action to put the UI Fund on a path to solvency that ensures families experiencing sudden unemployment will continue to be able to count on unemployment insurance benefits.
Under the flawed current system, California has racked up more than $10.5 billion in debt to the federal government, forcing the state to borrow from the worker-funded Disability Insurance fund just to stay afloat.
“Workers who have experienced the trauma of losing a job through no fault of their own understand how vital unemployment insurance is to their families,” said California Labor Federation Executive Secretary-Treasurer Art Pulaski. “We can’t allow our state’s Unemployment Insurance Fund to slide into an abyss of debt that threatens laid-off workers’ unemployment checks. It’s time for sensible solutions that create a solvent fund that workers can rely upon in a time of need.”
Currently, California lags far behind neighboring states in terms of benefits paid to unemployed workers and contributions required by employers.
Since 1983, California businesses have only been paying UI taxes on the first $7,000 of each worker’s earnings. In 1983, that represented about one-third of the earnings of the average California worker. Today, it’s less than one-seventh. This wage base is the minimum allowed by federal law and ties California for last in the nation with Arizona. However, considering that California’s average annual wages exceed Arizona’s by 19 percent, California’s taxable wage base ranks last by a significant margin.
The report also highlights structural flaws that are keeping worker benefits well below the national average, stressing unemployed families that rely on unemployment to get them through hard times and local businesses that benefit from the economic output of unemployment insurance. States usually work to achieve benefit levels that offer a 50 percent wage replacement rate. However, California’s 29 percent weekly wage replacement rate is 7th lowest in the nation. In addition, these estimates don’t account for differences in the cost of living. A percentage adjusted to reflect California’s high cost of living would likely put our state at the bottom.
The report calls for the following fixes to the UI Fund:
- Increase and index the taxable wage base. To bring the UI fund into balance and keep up with rising inflation and wages, the taxable wage base must be adjusted upward now and should be indexed to automatically rise over time.
- Expand the tax rate schedule. Without changes to the UI tax rates, especially the top tax rates, the value of an experience-rated system will be lost, along with the incentive to keep workers working.
- Move to a forward-funded system. Rather than waiting for an economic downturn to replenish the fund, California should use economic booms to grow the balance of the UI fund when it is financially easiest for employers to pay more.
- Establish an employer surcharge to repay federal loans. California should join the 20 other states who levy a special assessment on employers to cover the cost of federal loans.
Fixes for Unemployed Workers
- Index benefits to account for rising wages and inflation. By pegging benefits to a percentage of the state’s average weekly wage, California can ensure that benefits will track wages and provide a similar value to workers over time.
- Create a dependents’ allowance. Adding a dependents’ allowance helps the unemployment insurance system keep families out of poverty during periods of job loss.