CIAO DATE: 02/05

Individual Unemployment Accounts

Abstract

The unemployment compensation system in the United States is out of date and in trouble. The system has four fundamental problems: (1) during recessions, it often cannot meet its financial obligations without federal aid or deficit spending; (2) it is out of step with the structural and cultural realities of the modern workforce; (3) it encourages layoffs and unemployment; and (4) it operates in isolation from other programs related to employment and financial security. We propose an alternative unemployment policy based on the individual unemployment account (IUA). The IUA would be a mandatory and portable individual trust to which the employer and employee contributed. It shifts control and responsibility from the employer and the state government to the employer and the employee, and it is compatible with the realities of a twenty-first-century economy. We begin by providing an overview of how the current unemployment insurance system works and discussing its problems. We then describe an alternative unemployment policy based on IUAs and discuss the benefits of such a policy.

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