Other Public Insurance Fin 434 December 5, 2005

By the end of today, you should be able to: Explain unemployment insurance Who is eligible How is it financed What are the benefits like Explain worker compensation Who is eligible How is it financed What are the benefits like

Unemployment Insurance Included as part of the Social Security Act of 1935 Now cover about 95% of all workers Gaps in coverage are domestic workers (e.g., house-cleaner), agricultural workers, and the self-employed Financed through payroll taxes

Unemployment Overview Insurance: provide periodic cash income to workers during periods of involuntary unemployment No demonstration of need is required Usually lasts for 26 weeks only, although it is often extended in periods of high unemployment Issues that it raises Does it provide disincentive for job seeking by individuals? Does it help job-worker “match quality”? Does it influence incentives for firms to layoff workers?

Who is Eligible? A worker must: Have prior attachment to the labor force Usually some minimum # hours in past year Be able to work and available to work Be actively seeking work Have satisfied any waiting period (usually 1 week) Be free from “disqualification” Cannot have left job voluntarily Cannot have been fired for misconduct Cannot refuse to accept suitable work A majority of “jobless” at any point in time are not eligible for UI (new entrants, job quitters, etc)

What are UI Benefits Like? Most states pay benefits for maximum of 26 weeks. Weekly benefit is usually equal to about 50% of worker’s normal wages, but subject to both minimum and maximum amounts Min often in range of $20 - $75 / week Max often in range of $200 - $375 / week Average often in range of $150 - $225 / week UI benefits are subject to federal income taxation

How is UI Paid For? Unemployment taxes levied by both state and federal government Federal tax = 6.2% of first $7000 in wages, but state taxes are offset against this Effectively about a 0.8% federal tax State taxes can vary: most >= 5.4% Experience rating “Good experience” can have state tax as low as 1% “Bad experience” can have state tax as high as 10% Why have experience rating?

Exit Rate from Unemployment # weeks 26 Prob of getting job this week given that unemployed in previous week What do you think is causing this up-tick?

Workers’ Compensation In the early 20 th century, the only redress most workers had if they were injured on the job was to do what Americans do better than anyone else in the world What was it?

Pre-WC Days Three common-law defenses available to employers made it difficult for workers to win suits Contributory negligence doctrine: worker could not collect if his or her negligence contributed in any way to the injury Fellow-servant doctrine: worker could not collect if injury was due to negligence of fellow worker Assumption-of-risk doctrine: worker could not recover damages if he/she knowingly assumed the risks inherent to the job Still, lawsuits were expensive for both employers and employees

WC Law Firms must provide benefits for losses resulting from work-place accident “Liability without fault” Employer is liable for providing WC benefits regardless of whether they would be considered at fault for the injury But benefits are well-defined and often limited All states now have WC laws – most are compulsory

WC Details About 90% of U.S. workers are covered Most states allow employer to comply by purchasing coverage from private insurer Some states have competitive state funds, and six states have monopolistic funds that are the only source for coverage Most states also allow firms to self-insure Required to post a bond or other security

WC Benefits 1.Medical care No waiting period and usually no limitations on the amount 2.Disability income Benefits based on whether disability is: Partial or total Permanent or temporary 3.Death benefits Burial allowances (flat amount) Cash payment to survivors 4.Rehabilitative services Medical and vocational rehab

WC Costs Employers who purchase pay a premium calculated as percent of payroll Varies based on occupation’s risk characteristics If premiums are high enough, employers are also subject to experience rating Premiums are a function of benefits paid to their workers in the past Employer costs have been rising rapidly Rising cost of medical care Expansion to include “mental stress” Increased litigation (legal costs are about 25% of WC costs)

WC Policy Issues Extent of coverage: labor unions have been critical of exemptions/exclusions for agricultural, domestic and casual workers Benefit adequacy v. incentives: Covers about 2/3 of earnings, and not adjusted for inflation High minimum benefits (and fact that WC benefits are not taxed) means that some low income workers are better off on WC – incentives issue Increasing costs Estimates that WC costs have tripled in past decade!

The California Case California’s WC costs soaring: $6.4 billion in claims paid in 1997 $17.9 billion in claims paid in 2003 Major issue in California recall election Concerns that spiraling costs had hurt business, driving business out of CA, and placing burden on cities, counties and non- profits “Arnold” made it a campaign issue

California Reform Governor Schwarzenegger signed into law April 20, 2004 Lowers state limit on disability payments Requires workers to choose from list of authorized physicians (restricts choice) Employers now liable only for % of injury that occurred on job, not for previous injuries Cost savings are not yet knowable

Illinois W.C. Reform Illinois is 19 th most expensive state in nation based on WC premiums IL companies pay 40% more than companies in MI, WI and IN July 20, 2005: signed into law First major overhaul in 20 years

Key Provisions Reduce medical costs Implements medical fee schedule that will be indexed to CPI Join 42+ other states – contain costs Some worker benefits increased Min ben paid to workers killed on job increased from $400k to $500k (or 20 to 25 years) Establishes fraud unit Strengthened penalties and fines New panel to expedite resolution of disputed claims to reduce litigation costs

Terrorism and WC 9/11/01 attacks In addition to lives lost, these attacks resulted in over $40 billion of insured losses Led many insurers to start excluding terrorism from insurance policies Terrorism Risk Insurance Act of 2002 Major federal government intervention in insurance market – provides federal “backstop” for insurance losses that arise as the result of a terrorist event