Click here to listen to the testimony. Christina Martin’s testimony to the House Interim Committee on Business and Labor starts at 41:00.

Co-Chair Garrett, Co-Chair Kennemer, members of the Committee:

My name is Christina Martin. I am a policy analyst with Cascade Policy Institute.

I am here today to talk about unemployment accounts. The heart of the unemployment account concept is that incentives matter.

In 1991, Michael Sherraden published Assets and the Poor: A New American Welfare Policy, which sparked an entire movement of non-profit and government funded programs.  In his work, Sherraden showed how the key to getting ahead is not so much income as it is in building assets or wealth. Assets, as you know, include savings, homes, cars, and intangible things like human capital.

Sherraden observed, as many did in the 90s, that decades of welfare had largely failed to help individuals leave poverty, and instead had created cycles of poverty and government dependance by creating disincentives to success. For example, welfare discouraged asset accumulation by limiting how much savings an eligible individual could have. This encouraged people to think hand to mouth, and day to day, not long term. Sherraden and others’ observations helped stoke some good reforms, but much of that problem still exists today.

One intriguing result of Sherraden’s asset building movement was the creation of matched savings accounts called Individual Development Accounts. When an eligible individual saves a dollar in an Individual Development Account, a non-profit (often government subsidized) will match the savings, with usually one or two dollars. The savings can later be used to buy a home, start a business or go to school. In other words, the savings can only be used for the purpose of investing in certain important assets.

These accounts have proven that people with very small incomes can and will save when the incentives are strong. And it has led to life-changing choices – like buying a house, starting a business, or going to school.

Government programs tend to focus on income levels. But assets not only provide financial security, they actually can change the way people behave. Decades of research have shown that asset owners tend to lead more stable lives, think in longer time frames and have more hope for the future. They are also more likely to be involved in community affairs and to plan for their children’s futures.

The children of asset owners are more likely to succeed in school and to escape poverty. The effect of assets on education and test scores is more significant than that of income. Research by the Center for Social Development shows that most likely owning assets actually causes individuals to have greater expectations and, in turn, those expectations cause them to accumulate more assets.

One main focus of the asset building community has been to get rid of some of the asset limits that discourage saving. Similar to asset limits, government programs themselves, like unemployment insurance, cause individuals to save less.

Government safety nets themselves decrease the amount individuals feel they need to save. This effect is very strong with unemployment insurance.

Economists Eric Engen and Jonathan Gruber found that unemployment insurance decreases private savings for the typical unemployment spell by up to one-half.  Some may argue that this is not a problem since these workers may need less precautionary savings because of the government safety-net. But such a simplistic answer neglects the importance of owning an asset to individuals’ psychological well being.

Of course, unemployment insurance has more problems than just discouraging savings.

Last month, an owner of a bakery near Medford, Oregon told me about some of the problems his company faced due to the disincentives in Oregon’s unemployment insurance system. Two years ago, in the middle of the recession, this entrepreneur offered a job to a man who responded that he would not be able to start work for another month. Why? Because his unemployment benefits did not run out until then.

This example is one of many stories I’ve heard about the incentive problems created by unemployment insurance.  I had a friend who only applied for highly competitive jobs that she knew she had little chance of getting. She really preferred to stay on unemployment benefits. She was expecting her child to be born soon, and it didn’t seem make sense to start a new job, particularly since her husband was gainfully employed.

Peer reviewed research shows that people receiving unemployment benefits commonly take longer to find a job. Unemployed workers who receive benefits take more than twice the time to find a job than those who do not. The instances of recipients finding a job increase strikingly just before UI benefits are exhausted (see graph) That does NOT mean that individuals who use unemployment benefits are dishonest, lazy, or bad. It DOES mean that incentives and logic play roles in their job searches. A new job is not only work, but it is full of risks and uncertainty. In some cases, a new job may pay less than unemployment benefits.

Unemployment benefits come with certain requirements precisely because of these incentive issues. Workers must actively search for work and accept appropriate full-time employment. However, requirements are frequently ignored or misunderstood. A U.S. Department of Labor report showed overpayments in unemployment benefits across the nation amount to almost $19 billion in waste.

Beating the national average of 11%, Oregon overpaid an estimated $392 million over the last three years―about 12.2% of all state unemployment benefits paid during that period, according to the Labor Department. About one third of overpayments involved workers receiving benefits when ineligible because they were not available for work or because they failed their work search requirements.

So what’s the solution?

Chile’s unemployment insurance savings accounts have cut back on the disincentives that slow the job search for many who receive unemployment benefits. Chile’s workers and employers pay a portion of wages into Unemployment Insurance Savings Accounts. Each worker has his or her own account. When a worker becomes unemployed for any reason (even if it is voluntary), he or she may draw from the personal unemployment account. Workers who are laid off with small account balances receive help from a more traditional unemployment insurance safety net. When they retire, workers may use any remaining balance in their unemployment accounts

Chile’s experience is demonstrating that these accounts create an improved safety net that also improves some of the disincentives within the U.S. system. The personal accounts system motivates workers to return to work faster so they can have more money upon retirement. This system may not solve all overpayment problems, but it would prevent a significant portion of overpayments, since ultimately workers are first paid from their own accounts first.

Chile’s system also broadens the pool of eligible recipients, since workers own their personal accounts. That means workers who cannot accept full-time employment (like a working mother or student) and workers who quit their jobs for personal or professional reasons (who are not covered under our current system) would have more coverage under Chile’s system.

The question is then, not whether unemployment accounts can make things better, but rather what kind of unemployment account system would improve things for Oregon workers and businesses. Bill will discuss that more.

As you listen, please consider that this is about more than some pragmatic improvement to an old system.

This is about taking a system that has bad incentives and that teachers bad lessons, and turning it into something with healthier and more natural incentives. Remember that merely possessing a savings account can transform how people think. Studies by people like Sherraden have shown that building savings can actually cause people to make better decisions and think in longer terms. So the impact of something like this extends far beyond merely dollars and cents, into hearts and minds.


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