Unemployment Insurance Waste Is a Debacle Years in the Making

By William Yeatman of Cato.

"The joint federal‐​state unemployment insurance program (“UI program”) provides benefits to Americans who are out of work. States design and operate their own programs, subject to federal oversight by the Labor Department. In normal times, UI benefits are funded primarily by state employer taxes, while the federal government pays for administrative costs. In response to the pandemic, however, Congress significantly expanded the program’s coverage and benefits, including supplemental payments of $600 per week (subsequently adjusted to $300/​week). For all intents and purposes, Congress wrote a blank check, appropriating “such sums as the Secretary of Labor estimates to be necessary.” As of Jan. 2, 2021, states had drawn down a total of $392 billion from the expanded UI program; the Labor Department currently estimates that the program’s ultimate cost will exceed $873 billion.

Historically, the UI program has ranked among the worst performing in government. It is an annual presence on the Office of Management & Budget’s “high‐​priority” list of programs that unduly risk taxpayer money due to mismanagement. Last June, for example, the Office of the Inspector General told Congress that, [t]he Department has estimated that about 10% of UI payments are improper under the best of times, and we are in the worst of times.” Two weeks ago, the Inspector General warned that the overpayment rate for the pandemic UI program will be “much higher” than 10 percent. (My colleague Ryan Bourne discussed this report in a recent post).

How much higher?

In early 2021, California—the state with by far the largest UI program—told the Labor Department that it believes its improper payments could be as high as 27%. More recently, the Associated Press reported that states were “overwhelmed” by fraud. And yesterday morning, Axios reported that “criminals may have stolen as much as half of the unemployment benefits the U.S. has been pumping out over the past year, some experts say.”

No matter what, the taxpayer liability will be astronomical. The only thing we know for sure is that the improper payment rate will be “much higher” than 10 percent of an estimated $873 billion in federal payments. If, for example, California’s suspected rate (27%) applied writ large, then about $236 billion of taxpayer money would be wasted.

What happened? According to the Inspector General, “States did not perform required and recommended improper payment detection and recovery activities.” And why didn’t states do their due diligence? Of course, their increased workload was a major factor. Moral hazard, too—states were mostly spending federal money. And the Labor Department obviously failed to provide ongoing oversight. But the foremost factor identified by the Inspector General is the states’ “antiquated IT systems.”

In sum, UI fraud was rampant because many states failed to check for fraud, which was a failure due primarily to these states’ inadequate information technology.

Alas, there’s more to the backstory. The UI program became stressed during the last crisis—the Great Recession—and Congress threw money at the problem. That is, the American Reinvestment and Recovery Act of 2009 provided $7 billion that states could use to modernize their IT systems. However, an Inspector General audit in 2010 found that about half the money went directly to benefits or was left unused. So the modernization effort flamed out.

The upshot is that there’s plenty of blame to go around when it comes to the eye‐​popping waste involved with the pandemic UI program. For 14 of the last 17 years, the reported improper payment estimate for the regular UI program has been above 10 percent, so the program’s poor performance was no secret. During the last crisis, Congress authorized billions of dollars for a fix, but lawmakers never followed through, and the Labor Department dithered while the fix fizzled in the states. As a result, states have been incapable of responsibly stewarding almost a trillion dollars in UI benefits during the pandemic, and the taxpayer is on the hook for egregious losses."