Unemployment Insurance

Trust Fund Reserves Inadequate Gao ID: HRD-88-55 September 26, 1988

GAO assessed the financial status of states' unemployment insurance systems, focusing on: (1) trends in trust fund reserve balances and borrowing; (2) the possible effects of future recessions on reserve balances and borrowing needs; and (3) the effects of recent federal policy changes on the systems' financial conditions and benefit eligibility.

GAO found that: (1) although the June 1987 reserve levels were at an all-time high of $19.4 billion, they were inadequate to finance benefits that states would need to pay during a recession; (2) the reserves would last about 5 months in a severe recession, while recent recessions have averaged 12 months, and the Department of Labor recommended 18 months as a state minimum; (3) by 1983, no state fund had adequate reserves and 23 were insolvent; (4) improved economic conditions helped states to reduce federal indebtedness, although reserves remained inadequate to cover recession-level benefit payments; (5) state trust funds will not accumulate adequate reserves even if economic expansion continues; (6) federal policies increased the costs of insolvency to states to encourage them to repay federal loans promptly; and (7) states reduced the percentage of the unemployed eligible for benefits, from nearly 55 percent in 1952 to 32 percent in 1986. GAO believes that the failure of most state unemployment insurance funds to maintain adequate reserves has eroded the system's self-financing feature and increased the potential for massive borrowing.


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