WSJ has an article about how Larry Summers understood that extending unemployment benefits increases unemployment – something he apparently has forgotten now that he works for the White House
But the comments on the article and my polls and my life experience suggest that few people other than employers actually understand who pays for unemployment checks and how.
Unemployment checks are a state program, although there is a small Federal angle. Each state is a bit different in the details, but the basic principles are the same.
I’ll use Connecticut as an example, since that’s where I am. SUTA (and FUTA) is 100% paid by the employer. (FICA has nothing to do with unemployment insurance)
When a new employer starts out, there is a beginning tax rate for unemployment tax based on an average for the state over the past 5 years – that is currently 3.4%. The SUTA taxes (here) are based on the first $15,000 of income per employee per year. If someone quits and starts a new job, the $15,000 starts over. So the employer pays a maximum of $15,000 * 0.034 = $510.00 per employee per year… (until they develop an employment history)
As the employer gets older and former employees start filing for unemployment, the state keeps track of the benefits paid, and compares that to the amount the employer has paid in. After the initial year, the actual rate is computed (Benefits paid/taxable wages paid) and that becomes the employer’s “Charged Rate”. A small additional amount is added to cover employers that go out of business, etc….
If I had 10 employees each making $50k year, and the state paid out $25,000 in benefits, my SUTA rate becomes 16.67%
$25,000 / (10 * $15,000)
The idea is that in the following year, I’ll pay back the $25k in benefits, more or less….
The weekly benefit is 1/26th of the average of the two highest quarters of TOTAL income (not taxable) of the past 5 quarters. Let’s say an employee made $8k a month. They make $24k per quarter (average), so their benefit is $24k * 1/26 = $923.00 per week – roughly half of their income when they were working. However, the maximum weekly benefit is capped at $501.00
The unemployment checks paid come out of the amount paid in by the employer, and Charge rate is increased to match the ratio of benefits / taxable wage base. An employer can elect to avoid that process and just send in a check each month for actual benefits paid.
If the state as a whole has a lot of people on unemployment, the funds going into the state fund will start to exceed the amount going out – especially if existing employers shut down, since there is nothing left to “recapture” the deficit creating to pay unemployment to bankrupt or closed companies. In that case, the state can impose an additional assessment above and beyond the experience rate of individual employers – or can sell bonds to borrow money to pay benefits.
When the federal government extends benefits beyond the normal 26 week period, the employer pays only half of the cost of the extended benefits – the Federal government picks up the other half (hence States view extended benefits as extra income to the state). FUTA taxes may also be given out by the Feds to states that have an unusually high unemployment rate compared to other states.
So the longer that unemployment benefits are extended, the deeper the hole in each employer’s SUTA account – and once the economy turns around, it will be years of paying extra taxes to repay the state for past benefits – or more likely more motivation fo the employer to just go out of business permanently and/or move to another state.
(That’s an oversimplification – there are pages and pages of exceptions)
