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Protecting Members' Savings	The Co-op	26	If a co-op fails, its workers shouldn't lose their last paychecks and their savings along with their jobs. How an insurance pool paid for by the co-ops protects them, and what it can't promise.

Protecting Members' Savings

Every member of a co-op builds up savings in a capital account. That money is real, but it sits inside the same business that pays the member's wages. If the co-op fails, its lenders get paid first, and members' accounts are paid only from whatever is left. A worker can lose their job and their savings on the same day. Their last few paychecks may go unpaid too.

The model already limits how much can pile up (accounts are capped at a year's pay) and stops insiders cashing out first (every payout has to pass a solvency test). This page adds the missing piece: insurance.

What goes wrong in real life

• Fagor, 2013. When Mondragon's appliance maker went bankrupt, more than 900 former workers of Fagor and a related co-op sued Mondragon for €47.8 million of capital contributions they had lost. The courts turned them down, ruling in 2018 that the claim had been filed too late (Europa Press, via Infobae, 2023). Some savers had also bought Fagor's subordinated bonds believing they were ordinary deposits (elDiario.es, 2023). Mondragon did protect most of the jobs. Of 1,736 members in the Basque plants, 577 became members of other co-ops, 320 were moved temporarily, and many more retired early or were compensated, paid for partly by doubling contributions to Mondragon's own social insurance fund (elDiario.es). It had no equivalent protection for their savings.
• Italy's consumer co-ops, 2014–15. Italian consumer co-ops let their members keep savings with them, as a "social loan" to the co-op. When two co-ops in Italy's northeast failed, thousands of members' savings were frozen. At one of them, Coop Operaie di Trieste, 17,662 members held social-loan savings, and a rush of withdrawals set off the collapse (Wikipedia, in Italian). At the other, CoopCa, about 3,000 members had around €27 million at stake. Under the rescue plan they could expect three-quarters back at best, and not before 2018. Neighboring co-ops voluntarily paid them up to half of their money, €13 million in all (Il Fatto Quotidiano, 2015).
• Enron, 2001. Not a co-op, but the same trap: about 63% of the money in its workers' 401(k) retirement plan was in Enron's own stock when it collapsed (GAO-02-480T).

Three lessons come out of these. When members sense trouble, they rush to get their money out, and the rush itself can sink the firm. Savings get sold as safer than they are. And help after the fact is voluntary, partial and slow.

How similar protection works elsewhere

• Credit unions. America's credit unions are member-owned, like co-ops, and they insure their members' savings through a fund they pay for themselves. Each credit union keeps a deposit worth 1% of its insured savings with the fund, and the fund aims to hold reserves of 1.2% to 1.5% of insured savings (12 U.S.C. § 1782). Unlike this model, that fund is backed by the full faith and credit of the United States (NCUA).
• Bank deposits. Deposit insurance is paid for by the banks, through premiums that by law must rise with each bank's risk. The fund's legal minimum reserve is 1.35% of insured deposits, and its long-term goal is 2% (FDIC; 12 U.S.C. § 1817). It too has government backing.
• Unpaid wages in Europe. Every EU country has to run a guarantee institution that pays workers' unpaid wages when their employer goes insolvent: at least three months' pay (or a set minimum over a longer reference period), up to a ceiling. Employers help pay for it unless the government covers it all, and its money has to be kept out of reach of any employer's insolvency (EU Directive 2008/94/EC).
• A warning: America's pension insurance. The federal agency that insures private pensions has charged premiums only loosely tied to each plan's risk. The Congressional Research Service put them at "about half of the market price for the insurance." Companies in trouble let their pension plans fall further behind before going bankrupt and handing them over. By 2004 the program's deficit had reached $23 billion (Congressional Research Service, 2004). Insurance that doesn't charge for risk invites risk.

The insurance pool

Every locked co-op belongs to a members' savings insurance pool. It protects three things, in this order.

1. Final wages. If a co-op fails owing its workers pay, the pool pays up to eight weeks of each worker's unpaid wages and earned time off. For a low-paid worker, this is usually the biggest loss, and US bankruptcy law only partly protects it: unpaid wages get priority, but only up to $17,150 per worker, and only after secured lenders are paid (11 U.S.C. § 507(a)(4)).

2. Former members' payouts. When someone leaves, their account becomes a fixed amount the co-op owes them, paid over up to five years (see Member Capital Accounts). They no longer work there and have no say in how it's run, so this is the clearest case for protection. The pool covers these unpaid payouts up to $50,000 per person.

3. A protected slice of current members' accounts. A current member's account is different. It's their share of the risk of owning the business, and they help run it. So only a slice is protected: 80% of the first $10,000. That protected slice earns the plain Treasury rate. Only the part of the account that's still at risk earns the extra two percentage points (see Member Capital Accounts). Nobody gets paid a premium for risk they don't carry, and every member keeps some skin in the game.

The limits are per person, across every co-op they've ever belonged to. An account split in a divorce or passed to an estate shares the original person's limit.

How it's paid for

By the co-ops, not taxpayers. The pool has no government backing, for the same reason the bank's debts don't. A public guarantee would be a hidden subsidy, and markets would come to assume it. That's a real difference from credit unions and banks, and it's why the pool has to be run more cautiously than they are.

• A deposit to join. Like a credit union, each co-op keeps a refundable deposit with the pool, worth 1% of what's covered.
• Yearly premiums, priced as if nothing will be recovered. Members' accounts rank behind the co-op's lenders, so when a co-op fails, there's usually little or nothing left to recover. Premiums assume exactly that. They're set by an independent actuary from a published formula, and audited every year in both directions, like the bank's rates.
• Priced on the co-op's structure, not its last bad quarter. The premium depends on things like the size of the reserve and how much the co-op owes, measured from its audited year-end accounts. It can rise by at most one percentage point a year. A struggling co-op can defer part of its premium, as a debt to the pool. Otherwise the pool's own charges could push a weak co-op over the edge.
• Members pay for their own cover. The premium for accounts is charged against account interest, in proportion to each person's protected balance. Members who take all their profit share in cash, as low-income members can, don't pay for cover they don't have. The premium for final wages is paid by the co-op as a whole, since everyone is covered.
• Coverage grows as the pool does. Limits start lower and rise to the full amounts only as the pool's reserves reach their target of 3% of covered amounts, higher than for banks because nothing stands behind it. The pool buys reinsurance against a single large failure, where it can, and limits how much of its exposure can sit in one co-op or one industry.

What it costs, roughly. A mature 40-person co-op might have $400,000 of protected account slices, $200,000 of former members' payouts outstanding, and $300,000 a year of payroll at risk in final wages. If premiums run 1% to 3% of the covered amounts, depending on the co-op's strength, that's roughly $6,000 to $25,000 a year. That's about 1% to 4% of the $600,000 annual profit in the capital accounts example. The real rates will come from the pool's actuary and its early experience, not from this guess.

Who runs it, and how claims are paid

• An independent board. Most of its members are independent (actuaries, former insurance regulators, people with no stake in any co-op), not representatives of the co-ops that pay premiums. Otherwise the biggest co-ops could keep their own premiums low at everyone else's expense. Board members step aside from anything involving their own co-op.
• Federations can run their own pools if they meet the same standards and reinsure each other, so insurance can stay close to the co-ops it covers. Co-ops outside a federation join the national pool.
• Automatic payment. When a covered co-op fails, the pool pays from the co-op's own member register and payroll records. Nobody has to know to file a claim. Fagor's former workers lost their case partly because they filed too late. Disputes go to an independent adjudicator.
• Stepping in early. Every covered co-op sends the pool quarterly accounts. If warning signs appear, the pool can stop covering new additions to accounts until the co-op recovers, which stops members from piling up covered savings in a sinking firm.

Closing the loopholes

• No paying out phantom profits. Before paying, the pool's own auditor or the liquidator rechecks the last two years of accounts. Losses that were hidden or booked late are charged to accounts first. A covered balance can never be more than the allocations reported to the IRS.
• No quitting just before the fall. Anyone who left within a year before a failure has their balance recalculated to share the losses of the year they left and the year after, before coverage applies.
• No stuffing accounts. Amounts added to accounts in the year before a failure are covered only up to the co-op's normal split, meaning its average over the previous three years.
• No cover for brand-new shells. Account cover starts after a co-op's first three years of audited accounts, and every covered co-op must pass the same checks as bank borrowers: real members doing most of the work, verified against payroll records (see Guarding the Pilot). Final-wage cover starts at once.
• No underreporting. Payouts are based on the lower of what the co-op reported and what it actually owed. Unpaid premiums are deducted from payouts, and directors who file false reports are personally liable.

No selling savings as something they're not

Both Fagor and the Italian co-ops got into trouble partly because members' money was held in things that looked like bank deposits. So:

• A locked co-op can't take savings deposits from its members, or sell them bonds or other investments. A member's only money in the co-op is their capital account.
• Every member gets a plain statement each year of how much of their account is protected, how much isn't, and what the pool can and can't promise.

What it can't promise

• A wave of failures could outrun the pool. Co-ops in the same region or industry tend to fail together, in the same recession. If claims exceed what the pool has, it pays everyone the same share of what they're owed at once, then pays the rest as money comes in. That rule is published in advance, and members are told about it every year. This model gives the pool no government backing, so it can't promise more. It's insurance, not a guarantee.
• It starts small. It will be weakest in its early years. That's why coverage phases in, and why account cover starts only after three years.
• Members pay for it. Premiums come out of account interest and profit. That's the honest price of making savings safer.
• Bankruptcy law may not cooperate. Courts can push former members' claims to the back of the line, behind other creditors, which makes the pool's recoveries even smaller. That's another reason it assumes nothing comes back.
• The legal form is unsettled. A pool like this is insurance under state law. It would probably need to be chartered by the same federal statute as the bank, or licensed as a mutual insurer in each state. This is listed in Open Problems.