Insolvent, insufficient, and inefficient, it’s time to reform unemployment insurance

During the Great Recession, 36 state unemployment trust funds became insolvent. That means that the state funds had distributed all of their reserves, that claims for unemployment payouts exceeded the taxes being collected, and that the state was required to borrow money in order to pay all the claims that came in. The federal government, for its part, filled in the gaping holes left by the states’ underfunded unemployment trusts by extending federal programs to the unemployed to the tune of $180 billion.

The unemployment insurance program is considered a federal-state partnership. States fund 90% of the benefits provided to recipients (except when the economy experiences a significant downturn), determine eligibility requirements, and set the level and duration of benefits offered. However, the federal government has an overriding interest in the health and security of these programs. As during the Great Recession, the federal government steps in when states cannot pay out claims. But the federal government has an even broader interest in making sure these programs are operating in the black – because the federal government has a duty to maintain the overall strength and stability of the national economy.

What happened during the Great Recession indicates that the unemployment insurance (UI) program is in need of reform. And this is no surprise. The UI program was established during the Great Depression through the Social Security Act of 1935 and has remained largely the same since that era. But problems have become obvious.

For one, states set their own policies regarding how to fund their UI programs and what benefits they will distribute to claimants, and it became clear that those funds had become chronically underfunded. States were not complying with recommended guidance regarding the level of reserves they should have in the trust.

As for the benefits provided to recipients, they are rarely sufficient to cover the basic costs of living. With payments that amount to less than half of what a worker was making prior to becoming unemployed, the system does not succeed in offering the social protection envisioned. As a result, unemployment even with UI benefits leads to widespread economic insecurity. What’s more – only 35% of those without a job qualify for UI benefits. What do the other 65% of the unemployed do?

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