Welfare fraud scandals in Minnesota have focused the nation’s attention on benefit abuse, and the US Department of Labor recently detailed a team there to investigate whether unemployment insurance (UI) benefits have been ripped off. There’s a good chance the answer is yes, and that some of the blame resides with how we pay for administering UI benefits. While that sounds like a boring topic, two facts might alter that opinion: during the pandemic, flaws in today’s administrative financing system contributed to delays in paying benefits to millions of claimants along with massive losses to fraud and improper payments, and nothing has been done in the years since to fix it.
That suggests the UI system remains at risk of providing poor customer service along with massive losses to fraud the next time the economy stumbles and more UI checks are paid. The good news is that affordable reforms can provide the resources states need to fend off abuse and pay the right amount of unemployment benefits, on time, to the right people. That’s the argument I make in a new report titled “Funding the Administration of Unemployment Benefits: Overview and Reforms to Improve Efficiency and Program Integrity.” While that doesn’t sound like a barn burner, the stakes for taxpayers are enormous. The COVID-19 pandemic exposed significant flaws in the nation’s UI system that resulted in the improper payment of at least $191 billion—and potentially upwards of $400 billion—in taxpayer funds nationwide. One temporary program, called Pandemic Unemployment Assistance, had a staggering 36 percent improper payment rate.
Those massive losses resulted from the poor design of temporary federal benefit programs, which created a record target for criminals bent on defrauding the system. Insufficient administrative resources—which start with funding for caseworkers and computer systems—bear significant blame, too. Lacking sufficient funding, states were unable to pay the right people on time or fend off attacks from everyone from petty criminals up to international crime syndicates. Without changes, the same system will once again be exposed to abuse when the next recession strikes and claims for benefits, and inevitable attempts to defraud the system, once again spike.
That’s a risk both parties want to address. The Biden administration proposed shoving more federal funds out to states, ignoring the current system’s obvious flaws. That system overtaxes employers while underfunding administration, leaving everyone but the federal middleman worse off. Republicans seeking reforms should consider a simple alternative—get the federal government out of the way and let states decide how much to collect and spend to properly administer UI benefits.
States already decide how much tax revenue is needed to cover the far greater cost of state UI checks. And there is plenty of money in this system that can be targeted to improve administration. Current federal tax revenues—which are meant to support administrative costs, among other program purposes—are consistently greater than what lawmakers provide states to run the system. Over the past four decades, more than half of what has been collected to administer this system has gotten lost in Washington instead of being returned to states for that essential purpose. As displayed below, in 2023 30 states got back less than 40 percent of the taxes their employers paid into the system to properly administer benefits.
If states instead could set and collect the revenue necessary to administer benefits, nearly all could increase their administrative budgets while simultaneously cutting payroll taxes on jobs.
States shouldn’t be given a blank check. The biggest losses during the pandemic involved federal unemployment benefits, which states administered but had little financial stake in protecting. That has to change. If states are granted more control over the administrative financing of the system, that authority must be accompanied by assurances that federal benefit dollars will be better protected. No more paying benefits before the claimant’s identity and prior work history is confirmed. And claims must be matched against prisoner rosters, death data, and claims filed in other states. All are common-sense measures needed to ensure benefits are not paid to identity thieves. If states don’t agree to those protections, they shouldn’t get more control over administrative funding or future temporary federal benefit dollars, either.
Congressional scorekeepers will show a modest cost for increasing spending on administering benefits, which is far less than the massive losses to fraud taxpayers just witnessed. Lawmakers should prioritize preventing a repeat of such fraud while ensuring unemployed workers get the benefits they deserve.
Matt Weidinger is a senior fellow and Rowe Scholar in opportunity and mobility studies at the American Enterprise Institute (AEI).
Read Full Article »