WORK IN PROGRESS- comments welcomed! HOW VIABLE IS THE SYSTEM OF UNEMPLOYMENT INSURANCE SAVINGS ACCOUNTS: SIMULATION RESULTS FOR ESTONIA

This paper investigates the feasibility and redistributive consequences of an institutional innovation: the replacement of the traditional unemployment insurance (UI) system by unemployment insurance savings accounts (UISA) – the scheme where each worker is required to save a fraction of earnings in his or her account, and draw unemployment compensation from it. By internalizing the costs of unemployment benefits, the system is expected to avoid the moral hazard inherent in traditional unemployment insurance schemes. Two important questions about its applicability, however, have to be addressed: 1. How viable is the UISA system? Unemployment insurance savings accounts eliminate pooling across individuals. If a significant proportion of workers cannot generate sufficient savings to draw upon during their unemployment spells, such a system may be non-viable. 2. What redistributive effects can be expected by the replacement of the UI system with the UISA system? For the U.S., research shows that such redistributive effects are likely to be small – what can be expected for other countries? Using a simulation methodology similar to the pioneering study of Feldstein and Altman (1998), the paper addresses the above questions in the context of Estonia, the country for which there exist exceptionally rich dataset. The 1995 Estonian Labor Force Survey offers a panel microdata covering 6 consecutive years, and in the paper we expand this period to obtain lifetime working histories for a representative sample of individuals. Preliminary simulation results indicate that in Estonia, relatively modest unemployment benefits could well be supported by the UISA system. Assuming a 3 percent contribution rate and a 60 percent replacement rate, 9-17 percent of workers end their active life with negative cumulative balance on their UISA account, and 30-45 percent of them experience negative balance on their UISA account at least once during their working life.