Privatize Unemployment Insurance

new-york-homelessThere is a raft of insurance out there for homeowners, pets, renters, travelers, and victims of floods, fires, theft, terrorism or earthquakes.  There’s even insurance if you lose your cellphone or your microwave breaks.  There is errors and omissions insurance, key person insurance, crime insurance, crop insurance and landlord insurance.  According to Wikipedia there are at least 66 types of insurance, and lets not forget Lloyd’s of London that will insure just about anything for the right price. None of these are run by the government.

So why don’t we do away with government funded unemployment insurance and let the private sector offer it?  First, by being in the business of trying to stay in business, fraud and abuse would be sharply curtailed by the private sector.  The government has the deep pockets of you the taxpayer to subsidize all the fraud and waste so they are not nearly as interested in being frugal with your money.  A private company that would have to compete with other private companies for your dollar would have to keep costs as low as possible and that would mean tight controls to prevent fraud.

Each of us could take out insurance based on our individual needs.  Let’s consider the $1,800 maximum payout in unemployment from California.  Let’s assume I cut back on some expenses.  In Orange County, where I live, the average rent is $1,500. My electric bill last month was $120, natural gas was $20, cellphone at $60.  That leaves me $100.  $25 a week to pay for gas, food, clothes and a beer to cheer my arrival to the poverty line.  Oh…and I am supposed to have income tax withheld from that $1,800, so really I am broke before I even begin.

I don’t think $1,800 is enough for most people in Orange County unless significant cutbacks are made.  I can’t even imagine what I would do if I had a family to support, a couple car payments, housing costs, etc…  $1,800 just wouldn’t cut it.  With government insurance, we would have to cut back, but with private insurance we could choose to or not.

We can all downgrade our lifestyles to live below a certain line, but if we had private insurance, we wouldn’t have to.  We can choose to downgrade or not, it just depends on how much we want to pay.  For example, if I look at all my monthly expenses as they are now and let’s assume it comes to $4,000 a month, I would sign up for an unemployment insurance plan that would subsidize me to the tune of $4,000 a month.  Now that might turn out to be a very high premium, let’s say something like $200 a month.

Maybe I don’t want to pay that much, so I go back to my budget and I decide that if I get laid off I can live without digital HD cable, my cellphone data plan, let’s toss the magazine subscriptions and the high-speed internet.  So by using a scorched earth policy on my monthly budget I get it down to $2,500 a month which is a premium of $80 a month…and that is something I could live with.

Each of us could perform this exercise and find a happy medium where the monthly premium is affordable and still provides a reasonable level of coverage.  And hey, if I don’t want to give up even my mochas and I still want coverage for $4,000 a month, as long as I can swing the premium payments, it’s my choice.

The insurance would be a lot like other insurance policies.  You would choose your coverage amount, the length of coverage and your deductible.  Once you know how much you need each month, you can decide for how long you think you’ll need it.  Three months? Six months? A year?  You decide.  The premium will be adjusted accordingly.  So what would a deductible look like on this plan?

We all know that we should all have a rainy day fund.  If we did not have such a fund, we would just sign up for an insurance policy with no deductible.  If we did have this fund, we could determine how many months it would sustain us and consider that as our deductible to determine the premium.  In this way, it would encourage savings because the higher the deductible, the lower the monthly premiums. No different than car insurance.  Every time my car insurance renewal comes up, I take a look at my deductibles and my monthly premium and I get some new quotes based on a higher deductible to see how much I could save every month by agreeing to pay more out of pocket if I get into an accident.

Let’s assume your budgeted costs for the month, at your comfortable standard of living, was $3,000.  If you had $18,000 in a rainy day fund you could live for six months before you had to file a claim on your unemployment insurance plan.  Your premiums would be lower because the private insurer would have looked at the odds of you staying unemployed for six months as unlikely and therefore the chances of you actually filing a claim would be reduced and to reflect that, so would your premiums.

I am sure the insurance companies would come up with very creative ways to create incremental revenue that would provide you a little but more assurance.  For example, by paying a little bit more per month, you might be guaranteed a larger payout if the unemployment rate goes above a certain percentage.  There is no end to the different unique ways you would be able to tailor your unemployment insurance to fit your lifestyle, your aversion to risk and your monthly budget.

And now that the government does not have to provide this insurance, how about they make our premiums tax deductible?

One of the key problems with welfare programs is that they more often help those who could help themselves than those who truly need it.  I could cut back on my HD cable and my high-speed internet and my Starbucks.  Still bad? Okay…turn off the A/C and no more eating out.  More?  Time to use coupons and scale back the cellphone plan and turn out the lights when I leave a room.  Still not enough?  If it comes to it, I could get a smaller apartment or maybe one in a cheaper city.  Still bad?  I can move in with friends or family.  Honestly, for most of us, by the time we reach this level of cost cutting, and if we are truly looking for work, it would have to be the Great Depression-The Sequel to still be unemployed.  It would take a year to cut back to this level and it’s unlikely that work could not be found somewhere in that time.

Also, as you cut back and say goodbye to your favorite things, the motivation to find a job increases.  Somehow, when someone else is paying for it, there just isn’t that much incentive to go out and get a job.  Say goodbye to the mochas, the Lexus, the cable TV and the steak and suddenly spamming Monster.com posts looking for work becomes an hourly thing.  We miss our lifestyle and maybe are embarrassed that we had to give so much of it up.

And let’s not forget that most people won’t accept any job that doesn’t duplicate the salary and benefits they had at the one they lost.  So as long as people are comfortable using the welfare system, they are less likely to take a job offered to them if it is less than what they made before.  In reality, if no welfare safety net existed, more people would take lesser jobs just to have some income rather than none.

Let’s be honest…most of us have most or all of these options.  At the end of the day, if unemployment insurance disappeared tomorrow, we would all still find a way.  UI is more about maintaining our current standard of living for as long as possible than it is about keeping people off the streets in cardboard boxes.  The vast majority of people would cut back, cut back some more, and then make the tough decisions like moving in with friends or family, selling off the Lexus and getting a KIA.  They would take jobs that paid less.  Like all welfare programs, the tough decisions are postponed or never made and always on the backs of others who must pay into the system to support those living off the system.  Those who do not want to make the tough decisions.

If we turned government funded unemployment insurance off tomorrow, I don’t think one more cardboard box would show up on the streets of America.



Categories: Unemployment & Labor Law

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