Jobless Insurance Needs Reform, Not Bailout

As in many other states, South Carolina's unemployment fund is nearing insolvency due to the growing number of unemployed. The unemployment insurance program is in dire need of reform, and proposals have been made to raise employer premiums or cut benefits to help bring the fund back into balance. But these reforms are a patch job at best.

Republican Gov. Mark Sanford understands a federal bailout of the state fund will inevitably lead to a hike in businesses taxes to cover the rising cost of unemployment insurance. Some projections predict a possible doubling of the current tax rate. But increasing the cost of doing business in that way will suppress economic growth and drive more businesses out of the state -- thereby increasing the burden on the unemployment fund even further.

Tax increases and government bailouts won't address the systemic deficiencies but instead will allow the existing problems to survive and continue to grow. Real reform that fundamentally re-examines the state's role in providing unemployment benefits is what's needed.

With its unemployment rate reaching 8.4 percent in November and payouts of around $14 million a week depleting the unemployment fund to nothing, the state recently requested a supplemental line of credit of $15 million from the federal government to keep the fund afloat through the end of the year. Unemployment officials are requesting an additional $146 million for the first quarter of 2009.

Sanford approved the request only after the Employment Security Commission agreed to an independent audit of the program -- which should have been done long ago. The commission initially resisted this push for increased accountability, preferring an internal audit instead. To his credit, the governor stuck to his guns and demanded the commission be held accountable for its role in the depletion of the fund.

For the past seven years, South Carolina's unemployment fund has faced a fiscal imbalance, with more being taken out through claims than was received through premiums paid by employers. South Carolina's unemployment fund has seen a steady decline since 2001, dropping from $800 million seven years ago to being virtually exhausted today.

Sanford is being unfairly attacked both in the media and by fellow legislators for not blindly reaching into the government bailout trough. His proposal to audit the commission as a prerequisite for a federal loan is a positive step that will provide solid evidence to encourage citizens and legislators to support change.

Given the state's record of poor management of the funds, privatization through individual unemployment accounts may be the best option. Individual unemployment accounts are a mandatory and portable individual trust to which the employer and employee contribute. These accounts shift control and responsibility for unemployment coverage from the employer and the state government to the employer and the employee. They offer the flexibility and individual choice many employees currently lack, allow individual employees more control over their money (which follows them from job to job), and lessen the administrative burden on the state.

Before injecting another $146 million in taxpayer dollars into an ailing system, it's important to know where the tax revenue is currently going, whether adequate measures are in place to ensure applicants are moving through the system and finding new jobs, and whether there is a concentrated effort to combat fraud. Sanford's request for an independent audit is a prudent one, and these efforts could lead to the identification of systemic deficiencies and encourage real reform.

Matthew Glans (mglans@heartland.org) is a legislative specialist for The Heartland Institute.