Since reserves in most States are now at a high level, we have assumed that a substantial part of the costs of benefits during the next 10 years should be met from these reserves. We have set therefore the minimum contribution rate at a point which will allow most States to pay adequate benefits if they utilize a considerable portion of their reserves. (See table 11, appendix IV-E, for funds available for benefits as of September 30, 1948.) The present system of State offsets against the Federal tax should be continued, but the percentage should be changed from 90 percent to 80 percent. The employer and employee would thus have to pay a minimum of 0.6 percent each to the State and 0.15 percent to the Federal Government. Thus the present Federal income of 0.3 percent of pay roll would remain unchanged although it would now be paid in equal shares by employer and employee. 10. Loan Fund The Federal Government should provide loans to a State for the payment of unemployment insurance benefits when a State is in danger of exhausting its reserves and covered unemployment in the State is heavy. The loan should be for a 5-year period and should carry interest at the average yield of all interest-bearing obligations of the Federal Government The Council believes that during a period of heavy unemployment, the Federal Government should stand ready to make loans to States whose unemployment trust fund reserves are in danger of being exhausted. In times of relatively light unemployment, a State would be expected to raise its unemployment contribution rate to prevent exhausting its reserve. That remedy would not be justified, however, during a period of heavy unemployment when an increase in the contribution rate would aggravate unemployment and impose hardships on many employers and employees. Equally disastrous in a time of heavy unemployment would be an attempt to preserve solvency by reducing the amount or duration of benefits or by restricting eligibility. The Council believes that present provisions in several State laws which provide for a decrease in benefits or an increase in contribution rates when reserves fall below a given point are contrary to sound policy. To obviate need for such measures, we recommend the establishment of a Federal loan fund. A State's need for a Federal loan may result from two causes: 1. The contribution rate established by a State may be too low to meet actual costs over the entire 10-year period. Since the volume and incidence of unemployment are difficult to predict and differ from State to State, some States will, through error, probably establish contribution rates too low to finance benefits. If they rely on the minimum rate set by the Federal Government (recommendation 9, p. 166), a few States will almost certainly find the rate too low to support an adequate benefit program over the cycle. 2. Although the rate may be sufficient to support the system over the cycle, the fund may be temporarily exhausted. It is expected that a State will establish a contribution rate designed to cover costs over a relatively long period, such as 10 years. This assumption was the basis used in determining the minimum contribution rate discussed in recommendation 9, page 166, and appendix IV-A. Such a rate, however, is not expected to provide income equal to outgo during some phases of the business cycle. Thus States with unusually severe fluctuations in the level of employment or with relatively low initial reserves might temporarily lack funds sufficient to meet benefit costs. If a State's need for the Federal loan results from the situation described under 2, the loan will be self-liquidating, because the State's unemployment contributions will in time yield sufficient revenue to repay the amount borrowed. But if the situation is that described under 1, the State will have to use other revenue sources or increase its unemployment contribution rate after the volume of unemployment has declined. The Council is aware that some States have constitutional provisions which, unless amended, will prevent them from taking advantage of these loans. It seems important to us, however, that the Federal offer be put on a businesslike basis with provision for the payment of interest and other safeguards against too frequent and too extensive borrowing. The loan should be for a 5-year period and should carry interest at the average yield of all obligations of the Federal Government. This is the interest rate now paid to the States by the Federal Government on the amounts which the States have on deposit in the Unemployment Trust Fund. No one loan should be greater than the estimated requirements of the State for the next 12 months but there would be no limit on the total amount which a State might borrow. The State would become eligible for a loan on meeting all other conditions if it had insufficient funds in its unemployment trust fund account to meet estimated expenditures for the next 12 months. To promote a more rational relationship between the contribution rates and the cyclical movements of business, it is desirable to prevent an increase in rates when unemployment is high. If a State increased its unemployment contribution rate before covered unemployment had dropped below a given percentage of covered employment in that State-an appropriate figure might be from 10 to 12 percent-further loans would be denied. To provide for prompt repayments of the loans, the Federal law should require that all contributions deposited in the State's unemployment trust fund account in excess of benefit payments expected in the next quarter would be applied against the loan. The loan should be negotiated by the Federal Security Administrator on application of the State agency and he would approve the loan for payment by the Treasury. As indicated in recommendation 13, p. 172, the income from the Federal Unemployment Tax Act should be earmarked for unemployment insurance purposes, and one-half of any surplus over expenses incurred in the collection of the tax and the administration of unemployment insurance and the employment service should be appropriated and credited to the loan fund. The War Mobilization and Reconversion Act of 1944 has already established a fund to provide advances to the States for unemployment benefits, but, under existing law, that fund would terminate on April 1, 1950. By July 1948 that fund, which was authorized to hold the difference between the 0.3 percent Federal unemployment tax and the actual administrative expenditures of the State and Federal Governments under title III of the Social Security Act, would have totaled $970,000,000 if the authorized appropria tion had been made.15 The amount already authorized for this fund should stand to the credit of the new loan fund and should be appropriated as needed. If the amounts available from both these sources prove insufficient to finance the necessary loans, the additional sums needed should be appropriated from general Federal revenues. 11. Standards on Experience Rating If a State has an experience rating plan, the Federal act should require that the plan provide (1) a minimum employer contribution rate of 0.6 percent; (2) an employee rate no higher than the lowest rate payable by an employer in the State; and (3) a rate for newly covered and newly formed firms for the first 3 years under the program which does not exceed the average rate for all employers in the State To finance an adequate system of unemployment insurance, some States will need to establish unemployment contribution rates higher than the combined employer and employee minimums of 1.2 percent required by the Federal Government. In such cases, the Council believes that the States should be left free to set the higher rates uniformly for all employers and employees or to relate the higher employer rates to the employer's individual experience with the risk of unemployment. The Council believes, on the basis of its analysis of the arguments for and against experience rating, that the Federal interest in unemployment insurance does not require prohibition of all experience rating but is concerned rather that contribution rates reduced through experience rating are consistent with reasonably adequate benefit provisions and sound fiscal practice. Under the Council's proposals for a minimum contribution rate (recommendation 9, p. 166), experience rating in most States could not operate to reduce the income of the system to a point which would threaten adequate benefit standards. Furthermore, the minimum rate would place a limit on the tendency of most experience rating plans to reduce contribution rates in prosperous times just when general economic principles dictate peak rates, and correspondingly would limit the increase in rates in periods of growing unemployment when it is desirable to have low rates. The Council believes that, after establishing certain safeguards, the Federal Government should leave to the States the option of maintaining experience rating plans. A minimum employer contribution rate of 0.6 percent would be automatically achieved under recommendation 9, p. 166, hence no specific Federal standard on this point would be necessary. The Council proposes, however, two Federal standards for State experience rating plans to replace the present requirements in section 1602 of the Federal Unemployment Tax Act, which would become obsolete under the Council's proposal. These Federal standards are as follows: (1) The contribution rate for employees should not exceed the lowest rate payable by any employer in the State, and (2) newly formed or newly covered firms, for the first 3 years under the program, should be required to pay no more than the average rate for all employers in the State. 16 This figure equals the 0.3 percent of pay roll collected by the Federal Government since 1936, minus the Federal costs of collecting the tax and administering the unemployment insurance program and all grants to the States under title III of the Social Security Act Grants to the States under title III include the expenses of administering unemployment insurance for all years and the expenses of the employment service related to unemploy ment for the years 1938 through 1941. The Council considers experience rating inapplicable to employees. Generally speaking, differentials based on company experience with the risk of unemployment could not be expected to stimulate employees to effective action in regularizing employment. In our opinion, all employees in a State should pay the same rate for the same benefits. We believe further that employees should not pay at a higher rate than their employers. It follows therefore that under experience rating schemes, the employee rate for all employees should equal the rate payable by the employer with the lowest rate in the State. Under the present law, new employers must have 3 years of contribution experience before they are eligible for a reduction from the full 3 percent tax rate. Many new business ventures, especially firms established by veterans, have felt this provision discriminatory, since they must pay the full rate, while some of their long-established competitors may pay less than 1 percent. The mere repeal of section 1602 would allow the States to determine the rates payable by new employers and newly covered employers more equitably than is now possible; the Council nevertheless believes that the Federal Government should go further and require State experience rating plans to stipulate that new employers will be required to pay no more than the average contribution rate for all employers in the State for the first 3 years under the program. Under the proposed standard, a State would be allowed to charge new firms a lower-than-average rate, perhaps the minimum State rate of 0.6 percent. RECOMMENDATIONS ON ADMINISTRATION 12. Combining Wage Credits Earned in More Than One State and Processing Interstate Claims The Social Security Administration should be empowered to establish standard procedures for combining unemployment insurance wage credits earned in more than one State and for processing interstate claims. These procedures should be worked out in consultation with the administrators of the State programs and should provide for the combination of wage credits not only when eligibility is affected but also when such combination would substantially affect benefit amount or duration. All States should be required to follow the prescribed procedures as a condition of receiving administrative grants. Similar procedures should be worked out, in cooperation with the Railroad Retirement Board, for combining wage credits earned under the State systems and under the railroad system In a State-Federal system, the Federal Government has a clear responsibility for seeing that the provisions of the several State unemployment insurance programs do not penalize workers who move from State to State in search of work. Of the 51 jurisdictions, 45 now have a limited type of voluntary interstate agreement on combining wage credits, but only if such combination is needed to make a worker eligible for unemployment benefits. No provision is made for combining credits solely to increase the benefit amount or duration and there is no safeguard to prevent the windfalls which may now result when a worker becomes entitled to benefits in more than one State. All States participate in a voluntary plan for the acceptance and transmittal of claims based upon wage credits earned in other States. Under present arrangements, however, long delays in the payment of these claims frequently result from divided authority among the States. The State taking the claim gathers the facts, while the State in which the credits were earned makes all decisions. An appeal under these conditions is particularly difficult to process. At present 18 States are engaged in an experiment in which the State where the wage credits were earned makes the initial decision only. All decisions on continuing eligibility are made in accordance with the law of the State in which the worker is applying for benefits. The Council believes that it is possible to work out more equitable protection for the interstate worker and that all States should be required to cooperate in giving such protection. The absence of even one State as a party to these agreements leaves a serious gap in the protection afforded. At present, even the States that have entered into voluntary agreements may withdraw at any time or merely refuse to follow the procedures agreed upon if they find them onerous. In our opinion, the Federal Government, in protecting the interest of the interstate worker, cannot afford to rely on the voluntary cooperation of individual States. The Social Security Administration should be empowered by statute to prescribe standard procedures for combining wage credits earned in more than one State and for processing interstate claims. These procedures should be worked out in consultation with the administrators of the State programs. All States should be required to follow the procedures as a condition of receiving administrative grants. The Council recognizes that Congress has long responded to the expressed need for special legislation for railroad workers and that unemployment insurance for such workers would be particularly difficult to administer under State laws, since a large proportion of railroad employment is performed in more than one State. The Council, in its consideration of the relationship of the old-age and survivors insurance program to the railroad retirement program, has noted, however, the large extent of shifting between railroad and other employment. The Council therefore strongly recommends that the Social Security Administration, the Railroad Retirement Board, and the State employment security agencies develop the provisions necessary for combining wage and employment credits for unemployment insurance that will neither penalize nor encourage shifts to or from railroad employment. 13. Financing Administrative Costs Income from the Federal Unemployment Tax Act should be dedicated to unemployment-insurance purposes. One-half of any surplus over expenses incurred in the collection of the tax and the administration of unemployment insurance and the employment service should be appropriated to the Federal loan fund and onehalf of the surplus should be proportionately assigned to the States for administration or benefit purposes. A contingency item should be added to the regular congressional appropriation for the administration of the employment-security programs. The administrative standards in the Social Security Act should be applicable to the expenditure of the surplus funds as well as to expenditures of the funds originally appropriated |