The National Center for Policy Analysis
(The NCPA is a nonprofit, nonpartisan public policy research institute that seeks innovative private sector solutions to public policy problems.)
DALLAS, Texas -- Chile leads the way with individual unemployment accounts
by William B. Conerly, Ph.D.
Chile was the first country in the Western Hemisphere to set up a social security system, and the first country in the world to reform it using individual investment accounts. It has again broken new ground by becoming the first country to use individual accounts in an unemployment insurance, or UI system.
Chile's move should prod the United States to rethink the way it provides a safety net for unemployed workers.
Chile previously had only a limited system of unemployment assistance. Some of the unemployed received a very small public benefit -- $14 to $30 a month, and a few companies paid severance to displaced workers.
The system now being implemented builds on Chile's success with individually owned retirement accounts:
-- Workers will pay 0.6 percent of their wages into individual accounts, while employers will pay a 2.4 percent payroll tax divided between individual accounts and a "joint account."
-- The accounts will be administered by the same private pension funds that manage Chilean workers' retirement accounts, and the funds will invest conservatively in a variety of securities.
-- The individual account will be in the worker's name and will not be paid out until the worker becomes unemployed or retires.
-- Unemployed individuals will be able to draw 30 percent to 50 percent of their previous wages for up to five months. The joint account will provide benefits to unemployed people who exhaust the balances in their individual accounts.
Unlike the U.S. unemployment system, Chileans will be able draw the funds out even if they quit or were fired from their last jobs. This will allow workers more flexibility in changing jobs.
The Chilean approach avoids the need for an adjudication system. In the United States, benefits often are not paid to workers who quit voluntarily or are fired "for cause." In one state, for example, the cost of determining whether a worker's job separation qualified for benefits and adjudicating the disputed claims adds up to 22 percent of the total administrative cost.
Chileans with money left in their UI accounts at retirement will roll the money into their individual social security accounts. This greatly changes job search incentives. Workers who find jobs more rapidly will build up a larger retirement nest egg. With the UI account appearing on the same statement as the social security account, workers will clearly see the connection between rapid reemployment and retirement funds.
A major problem with the UI system in the United States and other developed countries is that it gives workers an incentive to remain unemployed. Numerous academic studies have found that the system leads people to take longer to find new jobs. The more generous the benefits, the longer the unemployed take to find new work, on average. The Chilean approach solves this problem.
There is concern in Chile that the additional payroll tax will raise businesses' costs. However, based on the results of econometric studies conducted in the United States and Canada, it is likely that Chilean workers will bear 80 percent to 100 percent of the tax States burden in the form of lower wages.
The new system in Chile is actually a compulsory saving plan in which workers finance their own benefits. The U.S. unemployment system is also payroll tax funded, and it is also a compulsory saving plan, but for workers as a group rather than individually. Unlike the U.S. system, Chilean workers will benefit even if they are never unemployed.
Americans may want to consider individual accounts, which have been proposed by economist Martin Feldstein and by the John Locke Foundation. Other approaches are also worth considering. For example, Oregon diverted some unemployment insurance taxes to pay wage subsidies to companies hiring unemployed workers. The plan focused mostly on low-skilled, less-experienced workers in need of mentoring and on-the-job training. The approach has not yet been extended to all of the state's unemployed, although a universal system is worth considering.
Instead of paying unemployment insurance taxes, government and nonprofit employers are allowed to self-insure. They simply reimburse the state employment department for any claims paid. The option of self-insuring unemployment benefits could be extended to businesses willing to post a bond to guarantee they will make the reimbursements. (A self-insurance option for workers' compensation is available to employers in 42 states)
More broadly, the nation should allow the states to experiment with unemployment insurance reform, as it has with some other programs. The greatest achievements in welfare reform came not from the 1996 federal welfare reform law, but from state experiments with alternative welfare systems under waivers from the federal government. The results from these state experiments strongly influenced the welfare reform legislation Congress later passed.
States also control the way workers' compensation for work-related injuries is structured. Many states have improved incentives for workplace safety, reducing accident rates and employers' costs. States should be granted similar discretion with respect to the structure of their unemployment insurance programs.
Our unemployment safety net has changed little since the 1930s, when most workers were in industrial occupations, most workers were men, and part-time work was not common. It's time we considered alternatives. It's time we mirrored Chile's willingness to weave the social safety net in imaginative new ways.
(William B. Conerly is a consulting economist in Portland, Ore., whose clients include the American Institute for Full Employment. He is also a senior fellow at the National Center for Policy Analysis.)
The Reason Foundation
LOS ANGELES -- Gravytrain troopers
by Tim Cavanaugh
In an era archly and promiscuously referred to as "wartime," one important safeguard of civilian government remains intact -- voters are still largely indifferent to candidates' military records.
On Nov. 5, Minnesotans rejected Korean War-era veteran Walter Mondale in favor of self-described "roadie for Ten Years After" Norm Coleman. In South Dakota, incumbent Sen. Tim Johnson, an Army veteran with a son serving in Afghanistan, squeaked by challenger John Thune only by bringing out the dead Indian vote. Ditto California Gov. Gray Davis, a Vietnam veteran nearly toppled by Bill Simon, a son so fortunate he's never even been in an Old Navy, let alone the U.S. Navy.
When Annapolis graduate and former Marine Corps officer Ray Clatworthy promised to "fight to give our soldiers the resources they need and the respect they deserve," Delaware voters opted instead to give plagiarist/interventionist Joe Biden (D-Del.) another six years in the Senate.
Most notoriously of all, incumbent Sen. Max Cleland (D-Ga.), who lost both legs and an arm in Vietnam, also lost his seat to Saxby Chambliss after Chambliss (a recipient of the Air Force Association's W. Stuart Symington Award who sat out the Vietnam War with a trick knee) impugned his patriotism.
This is not to rain on a Veteran's Day parade, nor to disparage the many combat and non-combat veterans who currently serve in American government. That voters have traditionally honored veteran status may be seen in the fact that 22 of 43 presidents served at least in militia or National Guard units. Granted, Ronald Reagan's commission of captain may have been awarded by the Academy of Motion Picture Arts and Sciences' Air Corps and George W. Bush's record in the Texas Air National Guard is still a total mystery even to the president. But 10 presidents have held the rank of general, and at least five -- Washington, Jackson, W.H. Harrison, Grant and Eisenhower -- were elected on little more than their silver-starred celebrity.
The American electorate is somewhere on a continuum between ignoring veteran status at the polls and following the quasi-fascist, veterans-only form of government eloquently promoted by Robert Heinlein in "Starship Troopers" (and even more eloquently satirized in Paul Verhoeven's "Troopers" movie). It's unlikely even the most adventurous voter would want a republic where Gulf War veteran John Allen Muhammad has more right to hold office than five-time Vietnam deferrer Dick Cheney.
Nor is there much proof that service confers the seriousness of purpose we would like to believe it does. Hawks were disappointed by bomber pilot George McGovern; on the other hand, the Kosovo votes of Sen. Daniel Inouye (D-Hawaii) showed little evidence that the Nisei hero was weighing the tragic seriousness of war. When Bill Clinton, possibly the least militarily credible president in U.S. history, wanted to launch bombing campaigns in support of the Kosovo Liberation Army, he found the Congress (as always) more than willing to abdicate its war powers authority.
Chambliss voters are upset at the widespread characterization of their man as a bilious chicken hawk. After all, why should Cleland's lost limbs give him a pass on national security matters? But Chambliss' case that Cleland is soft on defense was built on Silly Putty: He criticized Cleland's repeated votes against creating the Department of Homeland Security, a boondoggle of truly New Deal proportions and an obvious early Ramadan gift to the terrorists. (This is not to give too much honor to Cleland's Nay votes, which were based on the department's lack of worker guarantees rather than its dangerous uselessness.)
To his partial credit, Chambliss stopped short of raising churlish questions about the grenade accident that mutilated Cleland, but as with all things in politics, what mattered most was perception. It's the appearance of military credibility, rather than actual military credibility, that speaks to the voters. The most depressing thing to consider may be not that America's veterans get no respect but that wanting to empower invisible man Tom Ridge qualifies as a serious commitment to America's defense.
(Tim Cavanaugh is Reason's Web editor.)