The Unemployment Insurance

The Unemployment Insurance Crisis

By Alex Brill

As of this summer, unemployment insurance trust funds in 30 states were insolvent. With an unemployment rate near 10 percent, the media has focused on Congress’s inability to renew extended unemployment benefits. This recently expired federal law gave unemployed workers up to 73 weeks of federally funded benefits beyond the typical 26 weeks provided by states. As a consequence of the extenders bill stalling in the Senate, more than 1.25 million unemployed workers have stopped receiving benefits. But this legislative gridlock is not the only problem facing the unemployment benefits system. An overlooked fiscal crisis looms: the depletion of the trust funds out of which states pay unemployment benefits. As of June 24, unemployment insurance (UI) trust funds in 30 states and the Virgin Islands were insolvent, requiring loans from the federal government totaling over $38 billion. The Department of Labor expects that as many as 40 states will require federal loans in fiscal 2013, with borrowing totaling $93 billion. This amount is above and beyond the $130 billion in additional federal spending on unemployment benefits in the current economic cycle. The Department of Labor expects that as many as 40 states will require federal loans for unemployment insurance in fiscal 2013, with borrowing totaling $93 billion. To put these amounts in context, the federal government will loan more to the states than the stimulus bill provided for Medicaid. From a different angle, the $93 billion in projected loans is less than the rescue package that European nations and the International Monetary Fund provided to Greece ($146 billion), but federal spending to extend UI benefits since July 2008 has already exceeded $131 billion, and the net federal spending in this area far exceeds the Greek bailout. State UI programs are expected to build up reserves during periods of economic growth in order to have sufficient funds to pay benefits during a recession to people who have been laid off and are seeking employment. While pre-recession funding levels are a significant factor in maintaining UI trust fund solvency during a recession, the single most important determinant of UI trust fund balance is the health of the labor market. Extended unemployment insurance benefits since July 2008 has exceeded $131 billion, and the net federal spending in this area far exceeds the Greek bailout. Despite politicians’ rhetorically intense focus on job creation, the national unemployment rate is nearly 10 percent, up from 4.5 percent in May 2007. Initial weekly unemployment claim filings in 2009 averaged nearly 572,000, up from 321,000 in 2007. Total UI benefit outlays rose from $33 billion in 2007 to $120 billion in 2009. High unemployment claims drain trust funds, but rising numbers of the unemployed also decrease the number of workers for whom employers are paying into the funds. State collections in 2009 were 13 percent lower than pre-recession levels. This decline in collections combined with the heavy influx of unemployment claims completely emptied many states’ reserves. Put simply, the crisis that the state trust funds are facing results from the prolonged and significant recession. While states must strive to ensure that they accumulate sufficient trust fund reserves during periods of economic growth through an adequate tax structure and balanced benefits package, returning UI trust funds to solvency relies on larger, albeit indirect, policies affecting job creation. New jobs would have provided indirect but immediate assistance to states’ unemployment insurance trust funds by reducing the number of unemployment claims and raising additional revenue with each new worker. However, putting the trust funds back in the black will also require increasing taxes. If federal loans to states increase to $93 billion as projected, repaying them would take all state UI tax collections for 3 years at a typical pre-recession annual rate. In other words, state UI taxes would have to double for at least three years to repay current benefit spending. When President Obama signed the $862 billion stimulus bill last February, the administration projected that it would create or save 3.5 million jobs by the end of 2010, keeping the unemployment rate below 8 percent, by quickly implementing “shovel-ready” infrastructure and energy projects. But federal entities tasked with spending money on infrastructure and construction, designed to fuel job creation, struggled to get the money out the door. New jobs would have provided indirect but immediate assistance to states’ UI trust funds by reducing the number of unemployment claims and raising additional revenue with each new worker. Healthy UI trust funds depend on a normally functioning labor market, but efforts to stimulate the economy in 2009 did not worked as planned. The stimulus bill has cost more than anticipated, while the performance of the U.S. economy has been weaker than previously projected. In fact, the long-term cost policies established in the American Recovery and Reinvestment Act will be a drag on growth in the long run. Without effective policies to promote private-sector job creation, the road to recovery in the labor markets will be long and arduous. And as a result of these woes, state UI trust fund deficits will remain a significant fiscal challenge. Alex Brill is a research fellow at the American Enterprise Institute and was formerly chief economist and senior advisor to the House Ways and Means Committee. He recently testified before the Ways and Means Subcommittee on Income Security and Family Support.