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A primer on unemployment insurance

How does it work? Who pays? Who benefits?

May 8, 2019

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A primer on unemployment insurance

What’s unemployment insurance?

A federal-state program that pays workers who lose their jobs through no fault of their own so they may sustain themselves and their families until they find new jobs. The federal government requires all qualified workers be paid, but states decide the qualifications and amounts.

What’s the unemployment trust fund?

A U.S. Treasury fund that pays the cost of the program. Each state as well as the District of Columbia, Puerto Rico and the U.S. Virgin Islands has its own “state trust fund.”

The federal government recommends each state has as much on hand as the average of the three biggest annual benefit payments the state made in the last 20 years. Funds at this level are considered “solvent,” meaning at low risk of going dry in the next big recession

The government itself has three accounts to pay for program administration, extend benefit payments during serious recessions, and lend money to states when their accounts run dry. Three other federal accounts provide benefits for federal and railroad workers. The U.S. Treasury invests the trust fund in federal securities paying interest.

Who pays into the trust fund?

All but the smallest employers must pay state unemployment taxes though the exact criteria vary by state depending on payroll size. Some employers, such as railroads, and some employees, such as real estate agents on commission, are excluded.

How are taxes calculated?

Taxes are based on an employee’s wage, but the employer must pay. Wage determines how much benefits the state must pay a laid-off employee, but the employer is the one that makes the lay-off decision.

There are two main components. The taxable wage is the maximum amount of an employee’s wage used to calculate taxes. Tax rates depend on an employer’s history of layoffs. This works like insurance premiums; more layoffs mean more money taken out of the trust fund and, as a result, higher taxes for an employer.

 When funds run low, states may shift to higher tax rates and add surtaxes, which are flat taxes not based on layoffs.The federal government also levies a flat 6 percent tax, though it offers a 5.4 percent credit to employers in states that don’t violate federal requirements.

What happens when funds run dry?

By design, state trust funds are meant to be built up when unemployment is low and used up when it’s high. When a state fails to save up enough and can’t pay all jobless claims, it may borrow from the federal government or from the private market. Government loans are interest free for a time, but if they’re not repaid for two or more years employers in the state get their federal tax credits reduced, meaning higher taxes. If the federal account runs dry, the government borrows from the Treasury’s general fund.

What are the requirements to receive unemployment compensation?

States generally require unemployed workers to look for new work and be available to work. They also require workers to have held a job for a minimum amount of time.

What are the benefits?

Benefit amounts vary by state. Unemployment experts suggest benefits be large enough to replace half a worker’s wage, but as of 2017, only one state, Hawaii, managed to cross that threshold. The national average is a third of a worker’s paycheck.

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