Mass. Unemployment Fund Still Solvent in Economic Recession

With the national unemployment rate nearing 7 percent—a figure not seen in the U.S. since 1993—several states have seen their unemployment insurance trust funds shrink to dangerously low levels, with some states already taking out federal loans to pay unemployment benefits.

But Massachusetts’ unemployment benefit system remains “strong and solvent” for the foreseeable future, bolstered by over $1 billion in trust fund reserves, according to Robb Smith, director of Policy and Planning for the Mass. Labor and Workforce Development Office.

From January through November 2008, the state collected $1.4 billion in employer contributions and paid out $1.3 billion in benefits.

While employer contribution tax rates are set to increase this year, Smith said unemployment would likely increase as well—he estimated that the state would take in $1.5 billion in employee contributions in 2009, while paying out $1.7 billion in benefits.

“We’ve taken a look at the future with worst case scenarios, and we’re looking pretty good,” Smith said. “In 2008, we ended the year with the same amount of money we began the year with, which is not a bad thing. It would have been better if we made some money obviously, but we essentially have a billion dollars in reserve.”

Massachusetts ended November with $1.4 billion in its unemployment trust fund. In comparison, neighboring Rhode Island finished the month with under $100 million, and Michigan, hit hard by the auto industry’s collapse, is in debt by roughly half a billion dollars and is implementing a “solvency tax” on some employers to help replenish its fund.

The National Employment Law Project—an advocacy group for low-wage workers—reported in late September that Massachusetts was “marginally solvent,” meaning it could pay seven to 11 months of benefits using its reserves.

Massachusetts’ unemployment trust fund became insolvent during the 2003 recession, prompting the state to revamp its unemployment insurance system.

The system today includes five “schedules,” or brackets, of employer contribution levels, ranging from Schedule A, the lowest, to Schedule E, the highest, implemented based on trust fund reserve levels.

The state was supposed to shift from Schedule D to E in 2008, but the change was delayed until this year by the legislature.

“We’ve had no serious opposition to [the shift],” Smith said.

“Nobody likes it being done, but having unemployment insurance is a necessary safety net in the modern economy.”

Some experts suggested that further changes could help ensure future solvency in the trust fund and also benefit unemployed workers.

“One thing that could increase the long-term stability of a system is to increase the wage base on which unemployment taxes are calculated, and to index that to inflation,” said Noah Berger, the executive director of the Massachusetts Budget and Policy Center.

The state currently taxes up to $14,000 of employee income.

Margaret Monsell, an attorney at the Massachusetts Law Reform Institute, voiced similar suggestions.

“There’s some kind of tension between the amount of taxes paid—which is based on a fairly low number—and benefits received, which in a high wage, high cost-of-living state like Massachusetts is fairly high,” Monsell said.

“I think increasing the taxable wage base to reduce the gap between employer payments and employee benefits would be prudent to consider.”

—Staff writer Peter F. Zhu can be reached at pzhu@fas.harvard.edu.