Unemployment Insurance:

Issues Relating to Reserve Adequacy and Trust Fund Solvency

T-HRD-88-23: Published: Jul 7, 1988. Publicly Released: Jul 7, 1988.

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GAO discussed its analysis of issues facing the federal-state unemployment insurance (UI) system, focusing on states': (1) UI trust funds' financial health; and (2) actions during the 1980's in response to recessionary conditions and to new federal loan policies. GAO found that: (1) the system's ability to pay benefits from available reserves declined significantly after 1970; (2) as of December 1987, only four states had funds with adequate reserves; (3) over the last 15 years, state trust funds borrowed about $30 billion from the federal government; (4) most of the states with severe trust fund difficulties were in the most economically depressed areas; and (5) although sustained economic growth increased aggregate reserves to a historic high of $23.2 billion in 1987, many states remain vulnerable to an economic decline. GAO also found that the decline in: (1) reserve adequacy was due to high unemployment during the last 15 years, states' inability to fund extended benefits programs, and some states' indexing of benefits to inflation but not taxes; and (2) the proportion of unemployed receiving benefits was due to changes in work-force demographics and national industrial composition, as well as federal policy to cut benefits and improve solvency. In addition, GAO found that federal loan policy changes: (1) caused many states to increase UI taxes while reducing the proportion of the unemployed receiving benefits; and (2) resulted in increases in voluntary loan repayments, but did not encourage states to accumulate sufficient reserves to avoid future borrowing. GAO believes that Congress may wish to: (1) require states to build adequate trust fund reserves during low unemployment periods; and (2) consider program changes to help offset states' fiscal burdens during high unemployment periods.

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