Integration of unemployment insurance with retirement insurance

This paper analyzes a social insurance system that integrates unemploymentinsurance with a pension program through an individual account, allowingworkers to borrow against their future wage income to finance consumptionduring an unemployment episode and thus improving their search incentiveswhile reducing risks. This paper identifies factors which determine the optimaldegree of integration. A fully integrated system is one in which no reliance isplaced at all on a separate tax-funded unemployment insurance program. Weshow that when the duration of unemployment is very short compared to theperiod of employment or retirement, the optimal system involves an exclusivereliance on pension-funded self-insurance. This system imposes a negligiblerisk burden for workers while avoiding attenuating search incentives. We alsoargue that a joint integration of several social insurance programs with apension program through an individual account is desirable unless the risks areperfectly correlated to each other.