Mr. Chairman and Members of the Senate Finance Committee:
I appreciate this opportunity to appear before your Committee in opposition to H.R. 5173, the Reed Bill on unemployment compensation. It seems to me unthinkable that, during a time when the rate of unemployment under this Act has nearly doubled from what it was one year ago, and the rate of new claims has increased by nearly 80%, Congress would take steps to weaken instead of strengthen our jobless insurance program.
Massachusetts has a special interest in this bill - for, like Rhode Island, it has long suffered from chronic and seasonal unemployment, insufficient diversification of industry and heavy dependence upon manufacturing employment. Although our benefit and eligibility standards are not excessive and we were the only state besides Rhode Island which charged the full unemployment tax in 1953, Massachusetts has on the average paid out more than $0.80 for each dollar collected; and our state unemployment compensation reserve at the close of fiscal 1953 was less than 5 times as great as the benefits paid during the previous year, and barely twice as great as that year’s unemployment tax collections. Inasmuch as the 1948-1950 slump cut this state’s reserve nearly in half, a serious recession tomorrow could endanger its solvency. The latest data indicate that only 22% of Massachusetts workers covered by this Act could be paid benefits for the maximum 26 weeks out of the funds available. Inasmuch as the number of Massachusetts claimants has increased in one year by more than 85%, and the rate of new claims has jumped more than 50%, the adequacy of this program is of concern not only to the workers whose benefits may be reduced or with-held, or to those employers whose taxes may be raised; it is of concern to the whole state. Business Week on May 7, 1949, for example, stated that the paradox of depression unemployment rates in Lawrence, Massachusetts, without a business depression was due, according to Lawrence businessmen, to unemployment compensation, which they said had “proved to be an effective cushion for business - as well as workers - against the impact of layoffs.”
What has been true in Massachusetts has also been true on a national level, where in 1949 $1.7 billion - more than twice the 1948 level - was paid to maintain the purchasing power of unemployed workers. For fiscal 1954, benefits will undoubtedly again exceed $1 billion. In addition to Massachusetts and Rhode Island, other state unemployment compensation reserves may meet difficulties, if present economic trends continue to worsen, in both large states - such as New York, Pennsylvania, California, Illinois, Michigan and New Jersey - and less wealthy states - such as New Hampshire, Alabama, Maryland, Washington, Delaware and Alaska.
For these reasons, your Committee might consider several improvements in our unemployment compensation system, instead of the weaknesses proposed by this complex and misunderstood bill. As President Eisenhower pointed out, what he termed our “valuable first line of defense against economic recession . . . needs reinforcement” if it is to play its proper role in just the type of downturn we now face. These improvements are not contained in H.R. 5173.
A. Coverage. As pointed out by the President, Congress should act to cover 3.4 million employees of businesses with fewer than 8 workers, 2.5 million Federal civilian employees and 200,000 agricultural processing employees, among others, who presently face relief instead of social insurance.
B. Benefits and Duration. The President also pointed out that the present level of benefits is inadequate, having fallen from the original goal of 50% of weekly wages to an average of 33%; and the duration of the benefits is similarly inadequate, having permitted almost 2 million persons to exhaust their rights in a short time in 1949. Although the President recommended state action, I favor nationwide minimum standards to prevent any incentive for one state to undercut the standards of another.
C. Tax Base. Consideration should be given to raising the taxable wage base under unemployment compensation from $3,000 to 3,600, in order to keep to keep it on par with OASI, enable easier bookkeeping for employers, and strengthen reserves in states such as Rhode Island and Massachusetts.
D. Earmarking. The excess of Federal collections under the Act for administrative purposes over the expenditures for such purposes over the expenditures for such purposes, presently about $60 million a year, should be earmarked for strengthening the unemployment compensation program, instead of using this payroll tax to support the Government. Such earmarking is proposed in H.R. 5173; but it proposes to use such funds in a manner detrimental, not beneficial, to the unemployment insurance system.
I. THE LOAN FUND PROVISIONS OF H.R. 5173 WOULD NOT OFFER SUBSTANTIAL ASSISTANCE TO DEPLETED STATE RESERVES
General Limitations of Loan Programs.
Lending money to a state fund imperiled by heavy unemployment is unlike any other Federal aid program. When Congress is concerned with national problems of health, public assistance, education and other programs familiar to this Committee, it grants aid to the states on the basis of their need, and does not require such aid to be repaid.
A Federal repayable loan fund can only hope to deal with temporary crises at most. Instead of preventing disaster to a state reserve suffering from heavy and chronic unemployment, it merely postpones emergency taxation to pay back the loan.
For a long-term problem such as the decline in textile employment or a serious recession, a repayable loan is not sufficient. If a state struck by such an economic catastrophe must raise its rates to safeguard its fund or repay a loan, it loses more industry unable to compete with other low-tax areas, and thus is faced with both dwindling tax collections and mounting unemployment claims. Requiring such a state to be able to repay a loan under such circumstances increases the competitive disadvantages of some employers, - contrary to the original purpose of the Law; and improperly distributes costs over the business cycle, by requiring a state to raise its tax rates to repay the loan at the very time when its payrolls are diminishing and its businesses need help. Finally a very basic objection to any loan program is the fact that as many as 26 states, including Rhode Island, appear to be bound by constitutional restrictions in seeking loans.
One purpose of our unemployment insurance program is to share the risk; for, if the tax rate on each employer were to cover the full burden of unemployment in his industry, his tax might be as high as 20%. By pooling this risk within the state, its burden is more evenly distributed. Similarly, risks should be pooled on a Federal-State basis, whereby state funds which fall to a dangerously low level through no fault of their own would receive “insurance payments” from a reinsurance reserve to which all states contribute. I support S. 710 for this purpose, introduced by the Senators from Rhode Island, although I realize that there are alternative methods of establishing such a reinsurance program for this Committee to consider; but certainly a loan does not fulfill this principal of sharing the risk among all states.
Limitations of Loan Program of H.R. 5173.
The loan features of the bill before your Committee are particularly unhelpful. Compare, if you will, these provisions with the lending provisions of the George Loan Fund, Title XII of the Unemployment Compensation Act, which you originally recommended in 1944, and which expired on January 1, 1952.
A. First, the size of the loan fund in H.R. 5173 is limited to a maximum of $200 million, little more than New York’s claims in a normal year. No maximum was included in the George Fund.
B. Secondly, the eligibility provisions for a loan under H.R. 5173 are too restrictive, requiring the state reserve to be lower than the total benefits paid out during the previous 12 months (although the loan itself cannot exceed the amount of benefits paid during the highest of the preceding 4 quarters). Under the George provision, a state was eligible whenever its reserve fell below its annual rate of collections during the higher of the two previous calendar years, a situation which is more likely to occur unless the state is already paying out more than it takes in under a full tax rate.
C. Third, and most important, the repayment provisions of H.R. 5173 are too harsh. The bill provides that employers in a state which has not repaid a loan after a period of from 13 to 24 months (on the second January 1) face a 5% Federal penalty tax increase, and another 5% each year until the loan is repaid. This penalty applies even though the reserve fund continues to decline, even though the state must continue to seek new loans, and even though the excessive unemployment compensation tax is contributing to the deterioration of employment. Such a state would be required to reduce its benefits and increase its tax rates above the normal rate of 2.7%; or face collapse of the state system. Contrast these harsh provisions with the George Loan Fund, which contained no penalty and required repayment only whenever, and to the extent that, the balance in the state fund exceeded the higher of the annual tax collections during the two previous calendar years. President Eisenhower, in recommending a loan fund, specified that repayment by a hard-hit state should not begin for 4 years “in the interests of allowing a state a reasonable interim to readjust its economy and attract new industries.” For these reasons, I believe the loan fund provisions of H.R. 5173 do not offer substantial assistance to depleted state funds.
II. H.R. 5173 WOULD WASTE UNEMPLOYMENT COMPENSATION FUNDS NEEDED FOR BENEFIT PAYMENTS
The second feature of H.R. 5173 distributes to the states on the basis of their covered payrolls those funds not expended each year on administration or the loan fund. This, in my opinion, is one of the most extraordinary and fiscally irresponsible propositions ever to come before this body. Under this provision, states would receive monies raised by a Federal tax regardless of their need for such funds, regardless of the amounts they contributed to such funds and regardless of the amount they may have already received for similar purposes. Here is a bill which is extremely stringent in lending money to states in need; but which then distributes far larger sums, without any standards, to all states regardless of need. Surely no Federal grant-in-aid program could be approved on a basis whereby New York would receive 40 times as much as Delaware regardless of need.
The bill does not require that these funds be used for benefits; and most states today clearly would use the Federal gift for administrative expenses. Yet Congress already appropriates all administrative expenditures under this program, as determined by each state and reviewed by the Department of Labor and Congress; and if the amount appropriated proves to be insufficient, Congress provides a supplemental appropriation. But this bill requires the distribution of these funds for administrative purposes above and beyond what Congress determines to be necessary appropriations for those purposes, and thus renders meaningless the congressional function. The bill also requires state legislatures to appropriate the funds which Congress has raised. As stated by the Treasury Department:
“Sound administration counsels against a system whereby a legislative body appropriates funds it has no responsibility for raising. It is all the more undesirable if it occurs after the Congress has already appropriated what it deems to be necessary for proper and efficient administration.”
This provision, permitting the reduction of taxes during prosperous periods, and then eliminating this aid during recession, is in addition unsound. Moreover, a period of heavy unemployment may require more Federal and State administrative expenses than the 0.3% tax collects; but instead of establishing a contingency fund for such years, the Reed Bill requires each year’s surplus to be distributed in full, so that general Treasury expenditures would be required in such a year. Certainly this Committee, which is concerned with the cash budget and the statutory debt limit, should question a proposal encouraging the states to find new ways to spend monies which would otherwise be retained in the Federal Treasury, including those states - and there have been about 30 of them so far - who may already receive more in congressional appropriations for administrative expenses than they have paid in. Such funds should be saved for benefit payments in those states today or in the future whose reserves are threatened by serious unemployment; or at least in a contingency fund for years of heavy administrative expenses.
III. CONCLUSION
In conclusion, Mr. Chairman, let me add that this bill increases the prospects for complete federalization of unemployment compensation. It provides for excessive payments of Federal funds to all states. It requires state legislatures to appropriate funds raised by Federal tax. It encourages state employment agencies to expand their various administrative services to be subsidized by Federal funds. Its lending provisions require a change in the constitutional structure of many states. Its harsh provisions for repayment would keep some states continually dependent upon Federal loans to replenish the state reserves they are unable to build up. And finally, those states whose reserves are not adequately aided by this bill, whose benefits may have been sharply reduced and taxes sharply raised in order to prevent a collapse during heavy unemployment, will certainly demand complete federalization of the entire unemployment compensation system.
For these reasons, if the Congress does not now see fit to safeguard state funds by a program of reinsurance, I believe it would be preferable to have no action at all than to enact the Reed Bill which would waste these badly needed funds. If the lending provisions could be liberalized, and the provision for distribution of surplus funds stricken or at least restricted to benefit payments, that would constitute some improvement; but it would be far more logical to adopt the suggestion of the Administration and the House Minority Report that the George Loan Fund provision be re-enacted until more comprehensive legislation along the lines outlined is possible; and until the Commission on Intergovernmental Relations - whose establishment was recommended by the Senate Committee on Government Operations, of which I am a member, - completes its study of this subject. This present bill is an unjustifiable raid on our unemployment compensation benefits, and it would impair our jobless insurance program at a time when it is in critical need of improvement.
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