By Alexandra Forter Sirota
Director, Budget & Tax Center
The federal government established the unemployment insurance system after the Great Depression to support workers who lost their jobs through no fault of their own and to ensure that the economy could recover in the face of massive job loss. By providing temporary wage replacement, unemployment insurance enables jobless workers to maintain a modest level of economic security as they seek new employment.
As originally conceived, the unemployment insurance system would be funded through forward-financing—employers contribute to an unemployment insurance trust fund in good times so that in bad times, when benefit payouts increase and payrolls shrink, funds are available for jobless workers. Together, wage replacement and forward-financing can create an unemployment insurance system that protects the overall economy—workers and businesses alike—especially in historic downturns.
The Great Recession, which began in December 2007 and officially ended in June 2009, demonstrated the importance of unemployment insurance to workers and the economy. It has also made clear the problems that arise when the system abandons the fundamental design of forward-financing.
North Carolina’s Trust Fund is insolvent, having failed to build an adequate balance before the onset of the Great Recession, which quickly led to a drawdown of available funds as unemployment soared. The current crisis in the solvency of North Carolina’s unemployment insurance (UI) trust fund stems from state legislators’ decision to cut employer contributions to the fund in the 1990s, and it was made worse by the unprecedented levels of job loss and long-term unemployment that have characterized the Great Recession and its aftermath. In such cases, the federal government offers loans to help states meet their responsibilities under the UI system. North Carolina began borrowing from the federal government in 2009; as of May 2012, the state had borrowed $2.4 billion.
North Carolina’s UI trust fund insolvency did not happen overnight and will require time to address. As policymakers seek to improve the solvency of the system so that it works well for workers, employers and the economy as a whole, they should endeavor to do the following:
- Build a system that can better weather economic downturns by ensuring adequate fund levels to reduce the reliance on borrowing to meet benefit payments in downturns.
- Maintain the system’s ability to support the economy with wage-replacement levels that are adequate to support workers seeking work.
The Budget and Tax Center conducted a thorough analysis of the unemployment insurance system in March 2007, before the start of the Great Recession, warning of the long-term unsustainability of the system as implemented and suggesting reforms. This report picks up where the 2007 report left off and analyzes the current financial challenges to the system and presents options for reform.