Strengthening the Safety Net &#124; American Jobs Plan

Strengthening the safety net

The first component of the American Jobs Plan is to strengthen the safety net—including unemployment compensation, COBRA health coverage, and nutrition assistance. The Recovery Act signed into law last February contained two important supports for unemployed workers and their families. First, it provided for Emergency Unemployment Compensation for people who had been unable to find work before their benefits expired. It also provided a 65% federal subsidy of COBRA health care benefits for up to nine months to help make health insurance more affordable to the unemployed. These supports are critical to helping families make ends meet while they search for new work. But they are also highly effective at increasing overall demand in the economy, and therefore at creating new jobs.

Unemployment insurance

With long-term unemployment at record levels, 600,000 workers exhausted their unemployment benefits this fall before Congress approved an additional extension of benefits for 14 weeks in every state, and 20 weeks in states with unemployment higher than 8.5%. Unemployed workers can now collect a maximum of 99 weeks of unemployment compensation, including 26 weeks of regular state benefits and up to 73 weeks under the three federal extensions.

But when the Emergency Unemployment Compensation program expires on December 26, 2009, unemployment benefits will once again be exhausted after 26 weeks. This reversion back to normal pre-recession coverage will occur at a time of the highest unemployment rate in a generation and the highest spell of long-term unemployment on record. With unemployment expected to average above 10% for the next year, the number of job seekers will continue to far exceed the number of job openings, and long-term unemployment will remain high.

While unemployment benefits, which generally replace about 30-50% of pre-layoff income, are rarely sufficient to cover a family’s total costs, they can help pay for basic necessities such as food and some housing costs.

Two other Recovery Act provisions relating to unemployment insurance must also be renewed to maximize the assistance they provide. First, the Act increased every weekly benefit check by $25, an amount that provides real help to struggling families. And second, the first $2,400 of unemployment compensation was excluded from federal income taxation, saving the average unemployed person hundreds of dollars in taxes.

COBRA subsidies

The Consolidated Omnibus Budget Reconciliation Act (COBRA), passed in 1986, allows workers who are laid off from their jobs to keep their employer-sponsored insurance at their own expense for up to 18 months. The COBRA take-up rate by unemployed workers, however, has traditionally been low, largely because health care premiums are so exorbitant. Workers whose income has been cut by half or more can’t afford to purchase health insurance. The Recovery Act helped make insurance more affordable by subsidizing 65% of the cost.

However, even with that subsidy, only a relatively small portion of unemployed workers are electing to keep their employer-sponsored health insurance through COBRA. A recent report by Ceridian, which is the largest provider of COBRA administrative services in the nation, found that the COBRA take-up rate had increased from 12.4% before the Recovery Act subsidy’s implementation to about 17.7% between March and June of this year. “The historically low COBRA usage rates were not greatly improved even with a 65% subsidy, primarily due to the high premium cost,” the Ceridian report found.

An analysis of health care costs relative to unemployment benefits helps show how COBRA can be out of reach for a family, even with a seemingly generous 65% subsidy. In September, unemployed workers received an average weekly unemployment benefit of $333.62, which equates to a total monthly benefit of $1,446. The average monthly health care premium for a family in 2009 is $1,115, or 77% of the unemployment benefit without the subsidy, $390 or 27% with it.

Considering that many of the unemployed have been out of work for months and have likely exhausted their savings, and that unemployment benefits typically barely cover basic necessities like food and housing, it’s understandable that few could afford COBRA before the subsidy and may still not be able to afford it at 35% of the total cost. While an extension of the COBRA subsidy, currently set to expire December 31, 2009, is essential to help keep the unemployed from losing their health care, it is not sufficient. An 80% subsidy would bring the average monthly premium cost down to $223, more within reach of most families. In addition, the current nine-month duration of the subsidy should also be extended so that unemployed workers can have access to affordable health care for as long as they are eligible for COBRA.

Congress has already recognized that COBRA is widely unaffordable, even with a 65% subsidy. When it renewed and expanded the Trade Adjustment Assistance Act as part of the Recovery Act, Congress increased the COBRA subsidy for workers who have lost their jobs as a result of increased imports or production outside of the United States to 80%. All unemployed workers should receive the same benefit.

Nutrition assistance

In November the U.S. Department of Agriculture (USDA) reported that 17 million households had difficulty putting enough food on the table at times during 2008—a significant increase from 13 million households in 2007. The level of food insecurity that the USDA found in 2008 is the highest it has been since the nationally representative food security surveys were initiated in 1995. Increases in food stamp benefits are a particularly effective way to encourage consumer spending, because every dollar increase in food stamps is likely to be spent quickly and locally, and—according to chief economist Mark Zandi of Economy.com—will boost GDP by $1.73. Congress should examine options for increasing nutrition assistance.

Benefits of safety net spending

In addition to sustaining some of the neediest families, safety net spending in the form of unemployment insurance and health insurance subsidies helps the economy as a whole by circulating cash into local communities and helping businesses avert further job cuts. Each $1 billion of unemployment compensation generates an estimated $1.63 billion to $2.15 billion of additional GDP. If the unemployed did not receive insurance benefits, then their reduced consumption would be a serious drag on the economy, reducing demand for businesses’ goods and services, leading them to reduce investments and lay off additional workers. Rather than stabilizing the economy, limiting unemployment benefits would set off another round of disastrous payroll losses and imperil the recovery.

Policy recommendation

As the first components of the American Jobs Plan, EPI recommends continued extension of unemployment insurance and subsidized COBRA, as well as an increase in the COBRA subsidy to 80% from the current 65%. Congress should also examine ways to strengthen nutrition assistance.

Strengthening the Safety Net | American Jobs Plan