This paper explores the optimal social insurance system againstunemployment both theoretically and empirically. Using a simple theoreticalframework we show that unemployment insurance provides insuranceagainst unemployment risk and enhances distributional equity, whereas selfinsurancethrough borrowings promotes intertemporal consumption smoothingand maintains incentives of individuals. Then we use Korean and U.S.panel data sets to simulate the welfare effects of various insurance systems.Simulation results demonstrate that the intertemporal income smoothingeffect of self-insurance is fairly strong: even for a small degree of moralhazard associated with UI, increasing the portion of self-insurance improvessocial welfare. This continues to hold even when the government providessome retirement subsidy to poor individuals unless the moral hazard createdby government policies is very serious. We also discuss some interestingdifferences between Korean data-based analysis and U.S. data-basedanalysis.