The Bermuda Government Budget 2002 contains a brand new, almost revolutionary line item, the ‘seed' funding of an unemployment insurance fund.

Indications are that there will be a White Paper forthcoming sometime in the next year, and that Government would be looking to the business sector for input. As a former United States employer and employee, I can attest to the fact that undertaking the task of instituting an unemployment insurance fund is no easy matter.

It must be conceived, implemented, monitored, maintained, reported on, distributed from, enforced through compliance, and most importantly of all, the fund pool of investments must be managed appropriately to ensure that the programme remains solvent.

What is unemployment insurance? It is a tax levied on employers' gross payroll which is paid into a fund, then, invested in conservative investment instruments which allows growth while waiting for claims made against the pool. It is a series of payments - a form of partial security administered by a state - granted to those employees who have lost their jobs.

As we shall see later not all former employees are eligible for unemployment insurance. Generally - and we will use the United States as an example - unemployment insurance is a stopgap, a weekly subsistence, barely enough to put food on the table, just to keep you going until you find another job.

It will not pay the rent or a big mortgage; it will not buy any extras; it will not allow you to eat out because if you do, you will have nothing left. This support is strictly short-term with the maximum benefit in most states being about 26 weeks. At the end of this time it is assumed that the employee has re-entered the workforce.

Those unsuccessful at obtaining a new position tend to become totally defeated, no benefits, no job, and are often referred to as the hard core unemployed, not a pleasant situation to be in when there appears to be no future.

How is unemployment insurance funded? For a number of years in the US, I was owner of a financial service practice which employed several personnel, thus I have a first-hand employer's perspective on the cost of supporting the unemployment fund.

The tax is levied on almost all business structures, corporations, both S and C-corps, partnerships, limited liability companies, sole proprietorships, non-profit organisations and so on. In the usual irony, a sole proprietor must pay on his employees, but is not himself or herself eligible to claim unemployment.

Make no mistake about it, the money to fund unemployment insurance comes directly out of the profits (and the losses) of business operations. Even a struggling start-up company, or one falling on hard times must pay unemployment tax, payroll tax, and workers compensation. Failure to do so generates stiff penalties, levies, and the garnishment of bank accounts and attachment of other company assets.

In New Hampshire, for instance, the percentage of tax assessed on a new business, may be considerably less than that assessed on a more established business. The percentage base for all businesses is determined by actuarial computations after research into the total employee pool in an area, but the real ‘bite' occurs in the experience modifier of each business itself. It is not computed like workers' compensation insurance where hazardous occupations cost far more.

Loggers pay more than 100 percent of each dollar earned in worker compensation insurance as fatalities and loss of limb are common, while clerical staff worker compensation is low because the incidence of extreme injury is almost non-existent. Unemployment tax, however, is levied on an increasing sliding scale based upon the employee turnover in the business.

The owner is taxed on each employee working in the business up to $10,000 in gross annual wages. Those with consistent high turnover, such as the construction industry, may end up paying 500 percent or more than a small service group whose assessment may be less than one percent per $10,000 of wages.

This places considerable pressure on owners to leverage the abilities of employees and keep them long-term. Who qualifies for unemployment insurance? Having also been made redundant three times in four years - the Americans call it being laid off - during the recession in New Hampshire (1987-1994), I finally ended up being completely unemployed (no job in sight) and thus eligible to collect a generous $179 a week.

I can attest that being on either side (employer and employee) is a particularly challenging experience. The expression ‘being made redundant' so commonly used here always sounds slightly condescending, somehow not really conveying what the redundantee experiences, which is totally demoralision.

Add to that having to stand in line to collect benefits with other frightened and worried former employees is sad and depressing. Yet, when your job security is pulled out from under you like a warm blanket, you are most grateful for that small unemployment cheque each week.

There are ways, of course, to manipulate the system. Isn't there always when everyone feels they should pay their fair share?

Next week we look at ruses used by both employers and employees and other questions. Who pays for the business that goes bankrupt? Who pays for the startup business? Who plays games with the compliance? Who pays for the recalcitrant employee? Who pays for the employer who defaults on unemployment insurance, payroll taxes, workers compensation etc.? Who prevents the abuse of excessive and recurring claims?

How do employees get back into the workforce when their benefits have run out? Does unemployment change the way management treats employees? Does it really help?

Martha Harris Myron CPA CFP is a Certified Financial Planner (tm) (US) practitioner. She holds a NASD Series 7 license, is a former US tax practitioner, and is the winner 2001-The Bermudian Magazine - Best of Bermuda Gold Award for Investment Advice. Confidential E-mail can be directed to marthamyronnorthrock.bm. The article expresses the opinion of the author alone. Under no circumstances is this advice to be taken as recommendations to buy or sell investment products or as a promotion for financial plans. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.