What If Unemployment Benefits Were Structured as a Loan Instead of a Freebie?

by Darwin on September 18, 2011

There are a lot of strong emotions on either side of the Unemployment Benefits discussion.  On one hand, there are the current unemployed who are pretty miserable right now.  Many can’t find a job commensurate with their skill set and prior pay rate and they’re burning through their savings.  They’re sick of hearing politicians, the media and bloggers bashing them for being on the public teet after losing a job by no fault of their own.  And the checks they’re receiving don’t nearly cover their actual expenses.  On the other hand, we all know people who are totally scamming the system.  I know a few personally.  By pushing the collection period from a reasonable 26 weeks to an absurdly long 99 weeks, many Americans are questioning where it ends.  If 99 weeks isn’t sufficient, why stop there?  I mean, at some point, it becomes evident that the job market has shifted, skills are no longer in demand or the jobs the applicants are seeking no longer exist.  So, how do you assuage both camps and introduce some semblance of “fairness” into the equation?

I can see both sides to some degree but it’s evident our current system isn’t working.  To date, the only solution has been to keep extending benefits over and over but not to address the underlying issue.  Because there is economic evidence that extended unemployment insurance artificially increases the unemployment rate by deterring some from taking jobs (latest study), I was thinking about a middle-ground that might satisfy all parties involved.  What if unemployment benefits were treated like a loan instead of a no-look-back giveaway that leaves taxpayers and pundits pissed?  The unemployed could rightly highlight that they have some skin in the game and the currently-employed that complain would feel like the general tax fund gets some of that money back.  To understand why the current system provides an incentive to continue collecting benefits rather than working, check out this piece by my friend at Weakononics.  I love the $1 difference example – really hits home.  He had a neat idea about randomizing payments; mine is about making recipients pay something back.  Here’s how it would work:

  • Initial UI benefits wouldn’t change – Obviously, some guy who just lost his job and already lives on $20,000 a year is never going to pay back another $20,000 they just needed to live on after job loss.  You simply can’t save enough money to ever pay that back when you’re making close to minimum wage to begin with.  So, there would be some sort of cutoff where nothing would change – perhaps the initial 26 weeks the states normally provide.
  • Tiered Approach – How about all these extensions?  What could be done to entice a long-term unemployed to switch from a $2000 monthly check to perhaps taking a job that only pays $2,500 a month?  While many would just assume keep the $2K and not work as opposed to work full-time for the equivalent of an extra $500 per month, what if now you had to pay some of that back?  That $500 per month spread might look more like $1500 or more, right?  So, it could be structured such that after the initial 26 weeks, sure, you could now collect UI under the federal extension program, but upon re-employment, you’d have to pay back some portion of the amount collected.  Again, it would have to be low enough that it would actually be paid someday, but high enough to be meaningful.  Perhaps 25% of the amount.  Then, let’s say after a year, that increases further.  For a guy making $100K a year and collecting say, $30K of unemployment while looking for work, would it be out of line to seek to recoup say, $10,000 of that during his 5 years back in the workforce?  $2K a year?  These funds could be used to help fund the next round of unemployment during the next recession.  See, politicians tend to forget about the business cycle and spend high when the tax revenues are high, then ask for help during recessions.  This could help smooth the volatility and cause a lot less political wrangling.
  • Who REALLY Needs It?  I know 2 suburban moms who lost their jobs and would just assume be a stay at home mom because the husband’s salary is sufficient, but because they seem to have timed the layoff wagon perfectly, they’re now getting an extra check for 99 weeks.  They have no intention of looking for a job and stated exactly that – kind of actually bragging about the situation actually.  These people aren’t struggling by any means because mom was planning on making the switch from working mom to stay-at-home mom anyway.  But the tax base is basically subsidizing their Disney cruise trip and new minivan. So, what about a consideration of marital status/joint income and/or wealth?  Should a spouse collect unemployment when the total family income is more than sufficient?  Should millionaires collect unemployment?  That was a good question posed by Financial Samurai.

There’s the notion of what used to be reasonable and acceptable contrasted with the fact that America has to start making some tough decisions.  Not the decision to just “keep spending”, but the decision on where to stop spending.  We are reaching the end of the road here on unconstrained deficit spending.  We’ve gotta think out of the box and try to balance fairness, political will and leadership with actual results.  Because, you know…we can’t touch Social Security 75 years out for people that haven’t been born yet.  The images of granny with no heating oil and choosing between food and her medicine make voters cringe (no matter how far-fetched).  So, here’s something we could do in the moment – NOW.


What Are Your Thoughts?

Should the Unemployed “Give Back” when They Get Back on Their Feet?

{ 22 comments… read them below or add one }

Sustainable PF September 18, 2011 at 11:32 pm

In Canada the unemployment “insurance” lasts 10 months and ends – more or less, depending on where you live. We don’t have a nationally mandated program that lasts 99 weeks. That’s close to 2 years of money.

That being said, the other option is extreme poverty for those who aren’t abusing the system, who want to do a hard days work. A lot of people in your country and mine can’t find work – because they are not qualified or it does not exist.

This post proposes a tax on those who claim to need help from their government. Call it a loan, but it would be a tax. The govt would build in some sort of inflation numbers and likely an interest charge for those overdue.

The last thing the people who legitimately need the help is to include their government as a fire breathing creditor.


Sustainable PF September 18, 2011 at 11:34 pm

Forgot to mention – great article. Always love being intellectually stimulated about things I don’t always think about (and here in Canada we have a different reality it seems … eh?)


Darwin September 19, 2011 at 8:22 am

Well, people already get taxed on UI (which I’ve always found to be strange since it’s from the govt anyway), but perhaps there’s a means test for the “loan” provision. Like the example I gave above, a six-figure earner could reasonably pay back some portion of the benefits pretty easily. And morally, perhaps they should. Someone below the poverty line, obviously, they’re in no position to ever pay it back.


m September 18, 2011 at 11:43 pm

This is an interesting article. A few people scamming the system has never really bothered me, as I don’t view it as hurting me financially in any meaningful way (e.g. share of taxes or loss of total wealth).
Here’s one thing to think about: we clearly have a demand shortage in America. I don’t think it can be argued successfully that everyone who wants a job has a job (Casey Mulligan’s attempts have failed miserably). I think your idea has a lot of merit for times when we are near full employment, but I would tend to be less excited about it right now. Here’s why: anyone who wants to work should be able to work. If we are in a situation where a large fraction of the unemployed want to work but can’t find any, then pushing the scammers harder into the job market actually hurts the chances of the hard workers. In the long run the scammers are screwed anyway as their bens will run out and they’ll find themselves without skills and with huge gaps in their CVs.


Darwin September 19, 2011 at 8:23 am

There is a demand shortage for many, also a mismatch between skills and jobs in demand as well though. There are millions of open jobs right now and people just don’t have the right skill sets or don’t want to move. At least that’s what hiring managers are saying. We need some sort of broader job skills shift in the country.


Financial Samurai September 19, 2011 at 12:11 am

A lot of people should consider getting let go if they know the year they do is the last year they want to work. It’s a way to get their money back since all the government does is take!


Darwin September 19, 2011 at 8:25 am

Well, if people could time their layoffs, they’d even get severance if with a large firm, etc. Usually it doesn’t work out; people end up being let go earlier than they would have liked.


cashflowmantra September 19, 2011 at 5:02 am

What’s wrong with requiring everyone collecting UI to go to retraining classes or work for the government in exchange for their check? It might have to be part-time so they could look for a job during part of the day, but at least the government might be able to get some work out of it. The unemployed could clean offices or man toll booths or help in national parks or make license plates, etc. Don’t show up for class or work and you don’t get a check.


Darwin September 19, 2011 at 8:27 am

I read an article in BusinessWeek recently where in Hungary they actually put the able-bodied unemployed to work clearing lots, cleaning roads, etc. That would never fly here as it would be viewed as “not compassionate”.


cashflowmantra September 19, 2011 at 6:56 pm

Debtor’s prison is not compassionate.


Darwin September 19, 2011 at 7:25 pm

Yeah, I know, being sarcastic. The thing about this 99 weeks? It could be either 49 weeks or 199 weeks and the result is the same. If one is out of work that long, it ain’t gonna happen. They have to move, change skills, accept lower pay or something. Skills decline and people become LESS employable the more time they’re out of work.


krantcents September 19, 2011 at 7:50 pm

Many of the people lost their jobs due to poor economic conditions. Some of these people are older and will always have a difficult time to re-enter the job market. Should the limit be 99 weeks? I do not know, but a loan places more difficulty on them. I would rather see requirements for training or re-training along with the unemployment.


Darwin September 20, 2011 at 7:57 am

Sure, that’s why the means test on loan. Someone who’s never going to be able to pay it back, why bother. But someone with 30 working years ahead of them in the six figures? I don’t see why they shouldn’t give some of that back. They may not have even “really” needed it and they don’t into the future.


101 Centavos September 20, 2011 at 8:45 pm

I’m going to partially echo CFM. While I don’t like the idea of unemployment “benefits” on general free market principles, if you’ve got to have them, some sort of labor-themed quid-pro-quo might not be a bad idea. The modern equivalent of 1930’s style ditch-digging or fence-row building. Perhaps a brigade or two of unemployed could be renovating the Detroit metro station, or any other grab-bag of public improvement works.


Darwin September 20, 2011 at 9:36 pm

Ya know, with how inefficient our government is, I’ve gotta wonder how effective such a program would be anyway. I mean, we have to pay people to supervise them, have “shovel-ready” road projects, train them, pay for their disability and injuries and such. People that are unwillingly put on the equivalent of what the press and activists would label as “chain gangs” aren’t going to be willing participants. I suppose you could tie their checks to showing up to work, but it’s hard enough getting unmotivated paid employees to work, imagine pissed off unemployed?


101 Centavos September 21, 2011 at 6:13 am

I know, it would probably turn into a some kind of boondoggle. Much easier and painless for politicians to just toss money out to the coach window to the scrabbling peasants.


Jade September 21, 2011 at 2:10 am

Very eye opening post, thank you Darwin


Moneycone September 22, 2011 at 10:24 pm

When I think about it, I think that’s a brilliant idea! Will keep a check on freeloaders and genuinely help those who intend on finding a job.


Invest It Wisely September 24, 2011 at 2:00 pm

I don’t think the government should really be in the business of making loans to people — god knows the political quandry that would turn into and just look at the mess they have already created by intervening in similar ways. Besides, a real insurance program SHOULD not be a loan, but a return on premiums paid to cover risk.

I’d be a bit more partial to 101’s idea, but why not just have a free-market insurance program instead of a governent-mandated one. And, 99 weeks is ridiculous. I’d rather there be free-market insurance, and if need be, welfare to prevent people starving though I believe that if government did not impose such a heavy burden, this would never happen anyways because we would be a wealthier and more prosperous society, and charity would flow more freely. Even WITH all the intervention, people STILL end up hungry, and there are STILL plenty of food banks and volunteers ready to give their time and people willing to give their money in charity. Saying that welfare is necessary implies that people are heartless bastards except for the politicians in power who take your money by force. Kind of ironic, isn’t it?


Kellen @ AccountantByDay September 29, 2011 at 3:52 pm

Invest it Wisely – doesn’t the government already make loans to people? Student loans? Also, down payment assistance programs that are essentially loans that need to be paid back if the new home owner only lives in the home for a short period…


Kellen @ AccountantByDay September 29, 2011 at 3:54 pm

If you were to buy your own private unemployment insurance, what would you like it to cover?
Just basic money paid out to you for your period of unemployment, or defraying some retraining costs maybe? You could set how much payout you think you need, and how much time you think you’d want it for.
Of course, the mom happy to get fired because she was planning on becoming a SAHM anyway would still be able to collect on private unemployment insurance, which would still be a drain on everyone else buying from that company.


della October 6, 2011 at 3:40 pm

i think the company that lays off should be punished not the person who lost their job – never regardless. hell its not their fault. some of these people have been at their previous jobs 16 plus years or more as i have. im a college graduate and continuing my education still with a masters and cant find a job yet since 9/2010. this is ridiculus and is the sole responsibility of the company laying these people off.


Leave a Comment

{ 7 trackbacks }

Previous post:

Next post: