According to experts, the unemployment insurance program is not ready for a recession!
The prospect of a new U.S. recession has shed a light on the unemployment topic, with experts warning that the system for providing unemployment insurance program benefits could once again fail, just as it did during the COVID-19 pandemic.
Michele Evermore, a senior fellow at The Century Foundation and former deputy director for policy at the U.S. Labor Department’s Office of Unemployment Insurance Modernization, said the system is unprepared for another economic downturn. “If anything, we’re kind of in worse shape right now“, she added.
Unemployment insurance is designed to temporarily support workers who lose their jobs, helping to sustain consumer spending and the broader economy during tough times. However, according to a recent report by the National Academy of Social Insurance (NASI), the pandemic revealed significant flaws in the system, including outdated technology and an administrative structure that struggled to deliver benefits quickly and accurately.
Unemployment Insurance System Challenges
The U.S. unemployment rate was 4.3% in July, a low number by historical standards, but it has been gradually rising over the past year, sparking fears of a potential recession. Andrew Stettner, director of the Labor Department’s Office of UI Modernization, emphasized the need to fix the system’s flaws during good economic times so it can perform better during downturns.
During the early days of the pandemic, the national unemployment rate surged to nearly 15% in April 2020, the highest since the Great Depression. Unemployment benefit claims skyrocketed to over 6 million in early April 2020, up from about 200,000 a week before the pandemic. States were unprepared to handle this surge, and the federal programs introduced by the CARES Act to enhance the system only added to the strain.
The CARES Act introduced new programs that increased weekly benefits, extended their duration, and expanded eligibility to workers like those in the gig economy. Later, states had to implement stricter fraud prevention measures, which further complicated the system. The result was significant delays in benefit payments, leaving many households in financial distress and causing widespread frustration as people struggled to get help from customer service agents.
Even years later, the system has not fully recovered. For instance, the Labor Department considers benefit payments to be timely if issued within 21 days of an application. Yet, in 2024, only about 80% of payments have met this standard, down from roughly 90% in 2019. Indivar Dutta-Gupta, a labor expert at the Roosevelt Institute, emphasized the need to build a system that can handle the “worst part of the business cycle”.
Areas for Improvement
The NASI report outlined several areas where the unemployment insurance system needs improvement, particularly in administration and technology. States entered the pandemic with funding at a 50-year low, which contributed to widespread system failures.
The current system is primarily funded by a federal tax on employers, amounting to $42 per employee annually. The report suggests that increasing this tax could provide states with the resources needed to modernize outdated technology, improve mobile access, and ensure systems can adapt during crises.
Policymakers could also consider standardizing rules around benefit duration, amounts, and eligibility. Currently, states use different formulas to determine these factors, leading to significant variations. For example, in the first quarter of 2024, the average American received $447 per week in benefits, which replaced about 36% of their weekly wage. However, benefits varied greatly by state, with Mississippi recipients averaging $221 per week in June 2024, while those in Washington state and Massachusetts received around $720 per week.
Furthermore, 13 states offer less than the maximum 26 weeks of benefits, and there have been calls to uniform the 26-week period across all states. Proposals have also suggested raising weekly benefit amounts to 50% or 75% of lost wages and providing additional funds for dependents.