GUEST OPINION: Time to reform Massachusetts unemployment insurance system

By Charles Chieppo and Jim Stergios

Posted Jan 15, 2013 @ 02:27 PM

Unemployment benefits are funded by a tax on employers. Those whose employees have used the system more pay at a higher rate.Gov. Deval Patrick deserves praise for filing legislation that would freeze the rates Massachusetts employers pay to fund the commonwealth’s unemployment insurance (UI) system and make it harder for municipal employees to game the system. But even more encouraging is the governor’s suggestion that long-term structural UI reform may happen during the current legislative session.

In addition to freezing rates, Patrick’s legislation would close loopholes that allow seasonal municipal employees like bus drivers and substitute teachers to collect unemployment during the summer, and cap benefits for retired employees who return to work on a limited basis, then receive UI benefits in addition to a pension after they’re laid off. The proposals come from a task force commissioned by the governor.

There is far more to be done. Even with the rate freeze, Massachusetts employers pay $745 per employee in unemployment insurance taxes, dramatically more than in most states.

The costs to employers are driven by benefits that may well be the nation’s richest. In 2012, Massachusetts’ maximum weekly benefit of $625 was the highest of any state.

Bay State beneficiaries can also collect for longer. Most states set the time limit for collecting benefits at 26 weeks; Massachusetts alone allows people to collect for 30 weeks. Many beneficiaries look hard for a job from day one. But human nature being what it is, some take a more casual approach until benefits are about to run out.

It would be hard to imagine an economy in which jobs were more plentiful than the one Massachusetts enjoyed in 2000. The nation’s unemployment rate was 4 percent, but the commonwealth’s stood at a microscopic 2.7 percent.  Yet even that year the amount Massachusetts paid out in benefits was more than 50 percent above the national average. The reason was simple:  Whereas the average duration for collecting benefits was 13.7 weeks nationally, in Massachusetts it was 16.3 weeks.

It’s also easier to qualify for benefits in Massachusetts. Most states require a claimant to work for 20 weeks before becoming eligible; in Massachusetts it’s 15 weeks.

In addition to bringing the benefit structure more in line with national norms (understanding that the cost of living is higher here than in most other parts of the country), two other changes are critical to reforming Massachusetts’ UI system. The first is to extend the kind of municipal employee loophole closings Gov. Patrick included in his bill to all workers.

In his entry that won Pioneer Institute’s 2006 Better Government Competition, former director of Massachusetts’ Division of Unemployment Assistance John O’Leary noted that more than half those who applied for UI in 2004 had also applied in 2003. A stunning 700 individuals had applied in each of the previous 20 years. The reason is because owners of seasonal businesses can qualify for benefits by simply laying themselves off, and that has to change.

The second reform is to decrease the degree to which steady employers subsidize “frequent fliers” who use UI as an annual income subsidy. The owner of a Nantucket jewelry store laid herself off in the fall of 2004 and headed to Florida, where she was eligible to collect the maximum unemployment benefit for 30 weeks. Even paying the maximum premium as a result of a long record of abusing the system, she would pay only about $5,100 in premiums to get nearly $18,000 in benefits.

Real UI reform must change the rules on so-called experience rating to force frequent fliers to shoulder more of the cost of the benefits they and their employees collect, and reduce the subsidy from steady employers.

With its high cost and perverse incentives, Massachusetts’ unemployment insurance system is a job-killing machine. The reforms proposed by Governor Patrick are important steps in the right direction, but far more must be done to tame this beast.

Charles Chieppo is senior fellow and Jim Stergios is executive director at Pioneer Institute, a Boston-based think tank.