Two Problems in One: Unemployment Funds Used to Balance Budget

On Tuesday New Jersey voters will be asked if the state should end the practice of using surplus Unemployment Compensation funds to balance the budget. Such “trust fund sweeps” are used by many states to fill budget gaps, something I describe in a recent paper Fiscal Evasion.

Shaking the unemployment piggy bank into the general fund I think raises another important problem. How do we ensure governments don’t raid social insurance programs? Why not give workers individual control of their own unemployment savings accounts.

Implemented with success in Chile not only to Unemployment Insurance Savings Accounts (UISAs) shift control away from budget-rule bending politicians, they also alleviate the moral hazard problem with government unemployment benefits. A recent paper by Hartley, Ours and Vodopedic, offers empirical evidence of how Chile’s UISAs improve the incentive of the unemployed to seek employment.