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Meltdown 101: How are jobless benefits funded?

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[December 09, 2008]  WASHINGTON (AP) -- Joblessness has reached new heights that would have been shocking just a few months ago, and all signs point to more layoffs as the recession drags on. That means more and more Americans are relying on unemployment benefits to get by.

What's the source of funding for these payments -- and is there any chance the coffers might dry up?

HardwareHere are some questions and answers about the money that's distributed in unemployment benefits.

Q: Where does the money come from?

A: It's raised through state and federal unemployment insurance taxes on employers. The federal tax is 6.2 percent on the first $7,000 in annual wages to each employee. State tax rates vary from state to state, as does the amount of each worker's income that's subject to the tax -- which ranges from $7,000 to $34,000.

Q: Do all employers in a given state pay the same?

A: No. The rate they pay depends on how many former employees have drawn jobless benefits -- the more such workers an employer has, the higher the tax rate it must pay the state.

The irony is that employers responsible for the most joblessness as a percentage of their work force -- the ones that have gone out of business -- cannot pay their share of unemployment taxes because they've gone under.

Q: Are state and federal taxes the only sources of funding?

A: Not quite. A few states also impose unemployment insurance taxes on employees.

Q: How is the federal money divided?

A: There are three federal accounts. One pays for state program administration; a second for the 50 percent share of the extended benefits program (more on that later); and the third for a loan fund for states with unusually high unemployment


Q: Is there a ceiling on how much money can be in the federal accounts or is it just allowed to grow and grow?

A: Federal law does set ceilings. When they're reached, the excess is sent to the states' unemployment trust funds in proportion to the amount of money that came from the states.

The Congressional Budget Office, according to the U.S. Labor Department, calculated in its most recent estimate that the federal government would transfer about $9 billion to the states over the 2013-18 period. But that was calculated before the government had an understanding of the magnitude of the current economic recession.

Q: Who runs the unemployment programs, and who determines the size of the benefit payments?

A: The states. Typically, the benefits run for 26 weeks. Sometimes, during times like these, states or the federal government extend the benefit period -- the aforementioned extended benefits program.

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President Bush signed into law a 13-week extension in June for those who had already used up their benefits. He followed that in November with a seven-week extension -- 13 weeks for the states with the highest unemployment rates.

Q: How are the states doing with their own unemployment reserve funds?

A: Sixteen states had reserves in the range of zero to nine months as of Sept. 30, according to the Labor Department's most recent quarterly report. On the other extreme, Louisiana had 94 months of reserves, as its trust funds only dipped 3 percent over the previous 12 months.

Q: Zero to nine months? Does that mean there was a state with no reserves at all?

A: Yes. As of June 30, Michigan's reserves already had $177 million in unpaid federal loans.

To pay the interest on the loans, the state has imposed a solvency tax on an estimated 15 percent of its employers. Generally, they are businesses that have paid less in state unemployment taxes than their former employees received in jobless benefits.

Q: Are the states with the biggest problems in maintaining reserves the ones with the highest unemployment rates?

A: Not necessarily. For the month of September, Michigan had an 8.7 percent jobless rate and no reserves. Meanwhile, New York had a much better unemployment rate -- 5.2 percent -- and yet barely had more reserves -- only two months' worth.

[Associated Press; By DENNIS CONRAD]

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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