Other Public Insurance

1. Other Public Insurance Fin 434 December 5, 2005

2. By the end of today, you should be able to: • Explain unemployment insurance • Who is eligible • How is it financed • What are the benefits like • Explain worker compensation • Who is eligible • How is it financed • What are the benefits like

3. Unemployment Insurance • Included as part of the Social Security Act of 1935 • Now cover about 95% of all workers • Gaps in coverage are domestic workers (e.g., house-cleaner), agricultural workers, and the self-employed • Financed through payroll taxes

4. Unemployment Overview • Insurance: provide periodic cash income to workers during periods of involuntary unemployment • No demonstration of need is required • Usually lasts for 26 weeks only, although it is often extended in periods of high unemployment • Issues that it raises • Does it provide disincentive for job seeking by individuals? • Does it help job-worker “match quality”? • Does it influence incentives for firms to layoff workers?

5. Who is Eligible? • A worker must: • Have prior attachment to the labor force • Usually some minimum # hours in past year • Be able to work and available to work • Be actively seeking work • Have satisfied any waiting period (usually 1 week) • Be free from “disqualification” • Cannot have left job voluntarily • Cannot have been fired for misconduct • Cannot refuse to accept suitable work • A majority of “jobless” at any point in time are not eligible for UI (new entrants, job quitters, etc)

6. What are UI Benefits Like? • Most states pay benefits for maximum of 26 weeks. • Weekly benefit is usually equal to about 50% of worker’s normal wages, but subject to both minimum and maximum amounts • Min often in range of $20 - $75 / week • Max often in range of $200 - $375 / week • Average often in range of $150 - $225 / week • UI benefits are subject to federal income taxation

7. How is UI Paid For? • Unemployment taxes levied by both state and federal government • Federal tax = 6.2% of first $7000 in wages, but state taxes are offset against this • Effectively about a 0.8% federal tax • State taxes can vary: most >= 5.4% • Experience rating • “Good experience” can have state tax as low as 1% • “Bad experience” can have state tax as high as 10% • Why have experience rating?

8. Exit Rate from Unemployment Prob of getting job this week given that unemployed in previous week What do you think is causing this up-tick? # weeks 26

9. Workers’ Compensation • In the early 20th century, the only redress most workers had if they were injured on the job was to do what Americans do better than anyone else in the world • What was it?

10. Pre-WC Days • Three common-law defenses available to employers made it difficult for workers to win suits • Contributory negligence doctrine: worker could not collect if his or her negligence contributed in any way to the injury • Fellow-servant doctrine: worker could not collect if injury was due to negligence of fellow worker • Assumption-of-risk doctrine: worker could not recover damages if he/she knowingly assumed the risks inherent to the job • Still, lawsuits were expensive for both employers and employees

11. WC Law • Firms must provide benefits for losses resulting from work-place accident • “Liability without fault” • Employer is liable for providing WC benefits regardless of whether they would be considered at fault for the injury • But benefits are well-defined and often limited • All states now have WC laws – most are compulsory

12. WC Details • About 90% of U.S. workers are covered • Most states allow employer to comply by purchasing coverage from private insurer • Some states have competitive state funds, and six states have monopolistic funds that are the only source for coverage • Most states also allow firms to self-insure • Required to post a bond or other security

13. WC Benefits • Medical care • No waiting period and usually no limitations on the amount • Disability income • Benefits based on whether disability is: • Partial or total • Permanent or temporary • Death benefits • Burial allowances (flat amount) • Cash payment to survivors • Rehabilitative services • Medical and vocational rehab

14. WC Costs • Employers who purchase pay a premium calculated as percent of payroll • Varies based on occupation’s risk characteristics • If premiums are high enough, employers are also subject to experience rating • Premiums are a function of benefits paid to their workers in the past • Employer costs have been rising rapidly • Rising cost of medical care • Expansion to include “mental stress” • Increased litigation (legal costs are about 25% of WC costs)

15. WC Policy Issues • Extent of coverage: labor unions have been critical of exemptions/exclusions for agricultural, domestic and casual workers • Benefit adequacy v. incentives: • Covers about 2/3 of earnings, and not adjusted for inflation • High minimum benefits (and fact that WC benefits are not taxed) means that some low income workers are better off on WC – incentives issue • Increasing costs • Estimates that WC costs have tripled in past decade!

16. The California Case • California’s WC costs soaring: • $6.4 billion in claims paid in 1997 • $17.9 billion in claims paid in 2003 • Major issue in California recall election • Concerns that spiraling costs had hurt business, driving business out of CA, and placing burden on cities, counties and non-profits • “Arnold” made it a campaign issue

17. California Reform • Governor Schwarzenegger signed into law April 20, 2004 • Lowers state limit on disability payments • Requires workers to choose from list of authorized physicians (restricts choice) • Employers now liable only for % of injury that occurred on job, not for previous injuries • Cost savings are not yet knowable

18. Illinois W.C. Reform • Illinois is 19th most expensive state in nation based on WC premiums • IL companies pay 40% more than companies in MI, WI and IN • July 20, 2005: signed into law • First major overhaul in 20 years

19. Key Provisions • Reduce medical costs • Implements medical fee schedule that will be indexed to CPI • Join 42+ other states – contain costs • Some worker benefits increased • Min ben paid to workers killed on job increased from $400k to $500k (or 20 to 25 years) • Establishes fraud unit • Strengthened penalties and fines • New panel to expedite resolution of disputed claims to reduce litigation costs

20. Terrorism and WC • 9/11/01 attacks • In addition to lives lost, these attacks resulted in over $40 billion of insured losses • Led many insurers to start excluding terrorism from insurance policies • Terrorism Risk Insurance Act of 2002 • Major federal government intervention in insurance market – provides federal “backstop” for insurance losses that arise as the result of a terrorist event