Unemployment Insurance Program Overview UI Benefit Financing - - PowerPoint PPT Presentation

Unemployment Insurance Program Overview

UI Benefit Financing Seminar Division of Fiscal and Actuarial Services U.S. DOL/ETA/OUI October 23-26, 2018

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• The UI Program has 4 goals:

– Provide temporary wage replacement for individuals who lose a job through no fault of their own – Protect employers against dispersal of trained workforce while temporary shutdowns are necessary – Facilitate reemployment – Help Stabilize the economy

• On average, each $1 spent on UI benefits

generates about $2.00 in Gross Domestic Product (GDP) through the multiplier.

• Without the UI program, GDP would decline an

additional 15 percent, on average during recessions.

UI Program Goals

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• 10
• 5

5 10 15 20 25 1930 1933 1936 1939 1942 1945 1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 Annual Pecrent Change in GDP

Change in Real GDP

(Based on 2012 Dollars)

Source Bureau of Economic Analysis, US Dept of Commerce Recessions noted by shaded bands Last Data Point for CY 2017

0.0 0.5 1.0 1.5 2.0 2.5 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Percent of Total Wages

Revenues Collected & Benefits Paid

as a Percent of Total Wages Contributions Collected Benefits Paid

Recessions noted by shaded bands Last data point for CY2017

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Unemployment Insurance Program

• Background

– Born 1935 as part of the Social Security Act

• Titles III, IX and XII apply
• Designed as Federal/State partnership

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Unemployment Insurance Program

– Origins

• Several states had UI programs -- employers

paying taxes at competitive disadvantage

• Call for national legislation
• FDR established Committee on Economic Security
• Report issued in 1935 – basic objectives for UI:
• 1. Provide benefits for involuntary unemployment
• 2. Stabilize employment

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Unemployment Insurance Program

– Committee Recommendations

• States free to determine type of UI program
• Federal standards needed to ensure states

implement UI programs

• Federal-State system

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Unemployment Insurance Program

– Why Federal-State system?

• State-only system not working
• Entirely Federal system would be cumbersome

and difficult

• Hybrid system removes disadvantages in interstate

competition and allowed wide latitude for experimentation

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– Federal Level

• Statute

– Sets forth broad coverage provisions, some benefit provisions, establishes the Federal tax base and rate, and provides for administrative funding. – Motivates through incentives.

Unemployment Insurance Program

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– Federal Level

• Federal government functions:

– Ensures conformity and compliance of State laws and operations with Federal law – Determines and collects the Federal unemployment tax – Manages the Unemployment Trust Fund. – Responsible for administrative fund requirements and allocates funds. – Sets broad overall policy for administration of the program and monitors State performance

Unemployment Insurance Program

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– State Level

• State Statute:

– Sets forth benefit structure for benefit payment:

• Qualification requirements, eligibility

(disqualification) provisions, benefit amount, and duration of benefits – Establishes financing system:

• Responsible for tax rate and tax base

Unemployment Insurance Program

States Mandatory Federal Budget Discretionary Federal Budget Federal Federal $6.4 B Workers purchase goods and services and obtain new jobs

UI Trust Fund

Federal-State Unemployment Insurance (UI) System

States $36.2 B Benefits to Workers $28.8 B

Number

• f First

Payments 5.4 M Employers Taxes

Administrative Funding

States

$3.8 B Data are FY2018 est.

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– State Tax

• Tax rate is variable: depends on status of State

account and employer’s experience.

• On average, the estimated tax per job in CY 2017 was

about $317.

• For 2018, tax rates vary between 0.0% (possible in a

number of States) to 12.76% (Arizona) and are applied to wage bases from $7,000 to $47,300 (Washington).

• 5 States have a wage base of $7,000 (Arizona,

California, Florida, Puerto Rico, and Tennessee) .

• 3 States have employee tax (Alaska, New Jersey, and

Pennsylvania)

• State tax funds State benefits and State share of EB.

Employer Financing

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• Federal
• Uniform
• 6.0% of first $7,000 of each covered employee’s wages

(5.4% FUTA tax credit results in a net tax of 0.6%)

• $42 maximum per covered employee
• Pays for State and National/Regional Office

Administration for UI and the Employment Service, Federal share of Extended Benefits (EB), loans to States, Veterans Employment and Training Services, and Certain Labor Market Information activities.

Employer Financing

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Federal Unemployment Tax Act FUTA

• FUTA establishes the financing framework
• Section 3301 establishes the payroll tax rate

at 6.0%

• Section 3302(c)(1) & Section 3302(d)(1)

provide for a credit of up to 5.4%

• Section 3302(a)(1) and Section 3302(b)(1)

split the credit into two parts: “normal” credit & “additional” credit

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Federal Unemployment Tax Act FUTA

• Normal credit

– Amount of money paid in state UI taxes – Allowable if conditions in 3304 are met for the 12 month period ending on October 31 – Conditions in 3304 primarily deal with deposit and withdrawal standards and when compensation is payable – One way Federal law provides for incentives

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Federal Unemployment Tax Act FUTA

• Additional credit

– Amount of money determined by taking the highest tax rate any employer could receive during the taxable year or 5.4%, which ever is lower, applying that rate to the federal taxable wage base, and subtracting from the result the amount of an employer’s normal credit

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Federal Unemployment Tax Act FUTA

• Additional credit

– Allowable if conditions in 3303(a) are met for the 12 month period ending on October 31 – A key condition: employer tax rates are determined by “experience with respect to unemployment or

• ther factors bearing a direct relation to

unemployment risk”

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Federal Unemployment Tax Act FUTA

• Section 3306(b)(1) establishes the Federal

taxable wage base

• Federal wage base is currently $7,000

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FUTA Credit Mechanics

Example: State taxable wage base: $10,000 Employer assigned tax rate: 2.0% Maximum tax rate in schedule: 7.0% FUTA Payroll Tax(Section 3301) 6.0% x $7,000 = $420 Limit on Tax Credit 90% x 6.0% = 5.4% (Section 3302 (c)(1)) Minimum FUTA Tax Maximum Tax Credit 0.6% x $7,000 = $42 5.4% x $7,000 = $378 Normal Tax Credit (Section 3302(a)(1)) State Tax (on an employer) 2.0% x $10,000 = $200 FUTA Tax if no Additional Credit $200

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FUTA Credit Mechanics

Additional Tax Credit (Section 3302(b)) Multiply the lower of the state maximum tax rate or 5.4% times the federal 5.4% x $7,000 = $378 taxable wage base. Normal Credit (Actual State Contribution) 2.0% x $10,000 = $200 Additional Credit $178 Total Credit Total Tax $200 + $178 = $378 $420 - $378 = $42 Maximum credit = $378

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FUTA Credit Mechanics with 5% Max State Tax

Additional Tax Credit (Section 3302(b)) Multiply the lower of the state maximum tax rate or 5.4% times the federal 5.0% x $7,000 = $350 taxable wage base. Normal Credit (Actual State Contribution) 2.0% x $10,000 = $200 Additional Credit $150 Total Credit Total Tax $200 + $150 = $350 $420 - $350 = $70 Maximum credit = $378

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Unemployment Trust Fund

Unemployment Trust Fund

Pays 1/2 cost of extended benefits Ceiling = .5% of total wages In covered employment prior CY Makes loans to insolvent state accounts when needed Ceiling = .50% of total wages In covered employment prior CY Pays for state administrative costs Ceiling = 40% of current year’s appropriation

When all 3 Federal accounts reach/exceed their ceilings on

• Sept. 30, the amount in excess of the ceiling is distributed to

state accounts on Oct. 1.

53 State Accounts

Excess flows to ESAA Sept. 30 Excess flows to ESAA Sept. 30

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• Title IX of the SSA establishes the Unemployment

Trust Fund (UTF) which contains the accounts relevant to the UI Program: – Accounts for each of the 53 UI jurisdictions from which UI benefits are paid. – Employment Security Administration Account (ESAA) from which administrative funds are appropriated for UI, the Employment Service, Labor Market Information, and the Veterans Employment and Training Services. Receives 80 percent of FUTA tax

Unemployment Trust Fund

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– Extended Unemployment Compensation Account (EUCA) from which the Federal share of Extended Benefits (EB) is paid. Receives 20 percent of FUTA tax. – Federal Unemployment Account (FUA) provides advances to States whose State UI account becomes insolvent. Receives overflow from ESAA & EUCA.

Unemployment Trust Fund

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– Federal Employee Compensation Account (FECA) acts as a revolving fund from which benefits to ex-service persons and former Federal employees are paid benefits. The appropriate agency is then charged the amount of the benefits to replenish the account. Initially funded from general revenue.

Unemployment Trust Fund

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Sources of Funds

100 %

• Reg. Ben.

50 % EB. 50 % EB. 3rd Tier 100%. Federal State TAA UCX UCFE State Accounts FUA EUCA

Program Administration

FUBA FECA General Revenue ESAA Employer Taxes State Taxes FUTA

Abbreviations: EB – Extended Benefits FUBA- Federal Unemployment Benefits and Allowances ESAA- Employment Security Administration Account FUTA- Federal Unemployment Tax Act EUCA- Emergency Unemployment Compensation Account TAA- Trade Adjustment Assistance FECA- Federal Employees Compensation Account UCFE- Unemployment Compensation for ex- Federal Employees FUA- Federal Unemployment Account UCX – Unemployment Compensation for ex - service members

20%

State UI Reduced Credits to Loan Fund (FUA)

.120 to EUCA .456 SESA Grants .024 Fed Admin 50% EB 50% EB Claimant SESA

• Admin. Cost

State Tax* FUTA Employer Treasury IRS UTF DOL UI ES VETS BLS * Deposited in State agency bank account for transfer directly State Trust Fund account. Access only by State to pay benefits. Unemployment Trust Fund

Federal/State UI System

Resources and Distribution

Employer FUTA 6.0% Credit for State 5.4% Net FUTA tax 0.6% Tax = 0.6% of $7000 on each employee 1. Additional Tax credit reduction to loan 0.6 % Tax to ESAA .120 to EUCA .456 to SWA .024 to Fed

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Program Environment

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The Long-Term Unemployed still need assistance

Source: Bureau of Labor and Statistics: Current Population Survey

2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

(Thousands of Persons)

Incidence of Long Term Unemployed

July 2018 Long-Term Unemployment

22.7% of Unemployed Population 1.4 Million People

Unemployed over 27 Weeks Unemployed under 27 Weeks

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Job Growth and Unemployment Rate

SOURCE: Bureau of Labor Statistics

2 4 6 8 10 12 100 105 110 115 120 125 130

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Unemployment Rate % Private Payroll Employment (Millions)

Private Payroll Employment Unemployment Rate

0% 10% 20% 30% 40% 50% 60% 70% 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Calendar Year

U.S. Recipiency Rates

(All Programs, Annual, 1978 - 2017)

Unemployment Rates by State

Seasonally Adjusted, August 2018

(U.S. Rate = 3.9% ) 0% to 3% 3% to 4% 4% to 5% 5% and greater

Total Number

• f States

that have Borrowed Number of States with Outstandin g Balances August 30, 2018 Peak Amount Advanced to States Outstanding Advance Balance August 30, 2018

36 1 $47.2 B $68.6 M

Total borrowing over time and projected borrowing through 2024

200 400 600 800 1,000 1,200 1,400 5 10 15 20 25 30 35 40 45 50 Millions Billions $

End of FY Borrowing

Actual Forecast Private Borrowing Private Borrowing Forecast

Interest Paid on Title XII Advances

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Middle Class Tax Relief and Jobs Creation Act P.L. 112-96

• Short Time Compensation
• Self Employment Assistance

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Short Time Compensation

• Federal law gives states authority to

provide a reduced UI weekly benefit amount to individuals whose work weeks have been reduced.

• 27 states have an enacted law
• P.L. 112-96 modified STC and added

3306(v) FUTA

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Self-Employment Assistance

• Federal law gives states authority to

establish an SEA program under 3306(t) FUTA.

• 5 states have enacted programs
• P.L. 112-96 permits states to establish

programs for EB and EUC claimants.

Reemployment Services and Eligibility Assessments

• The Bipartisan Budget Act of 2018, Public

Law 115-123 established permanent authorization for the RESEA program by adding Section 306 to Title III of the Social Security Act.

• Federal Register Notice forthcoming to

request suggestions on how to allocate administrative funds.

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Glossary

• Benefit Payment Account – An account with a bank into which a

State transfers funds from its UTF account in order to pay benefits.

• Clearing Account - An account with a bank into which a State

deposits UI tax collections.

• ESAA - Employment Security Administration Account. Provides

administrative grants to States for UI, ES, some Veterans Employment and Training Programs, and Labor Market Information. Also pays for Federal administrative costs.

• EUCA - Extended Unemployment Compensation Account. Pays for

Federal share of Extended Benefits (EB).

• FECA - Federal Employees Compensation Account. Pays benefits

to ex-Federal workers and ex-service persons.

• FUA - Federal Unemployment Account. Makes repayable advances

to insolvent State trust funds.

• FUBA - Federal Unemployment Benefit Allowances. Appropriation

which provides for Trade Adjustment Assistance.

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Glossary

• FUTA - Federal Unemployment Tax Act. Authorizes Federal

government to impose a payroll tax on employers for each employee.

• NASWA - National Association of State Workforce Agencies.
• RJM- Resource Justification Model. A data collection instrument used

in the budget process.

• RESEA – Reemployment Services and Eligibility Assessments
• UCFE - Unemployment Compensation for former Federal Employees
• UCX - Unemployment Compensation for ex-servicemen
• UTF - Unemployment Trust Fund. Includes State and Federal

Accounts.

• UWC, Inc. - Unemployment and Workers’ Compensation, Inc. An
• rganization representing employers on unemployment and workers’

compensation matters.E