PRESS RELEASE: Unemployment Insurance Program Faces Unprecedented Borrowing

WASHINGTON, DC—Although unemployment insurance (UI) benefits have helped stabilize incomes for millions of families and have provided a boost to the economy, state UI programs are in their worst financial position since they were established in 1935.  A new brief released today by the National Academy of Social Insurance (NASI) discusses the unprecedented level of borrowing by state UI programs during and after the Great Recession and current legislative proposals to improve the solvency of these programs.

“The current financing crisis in state UI programs can be described as a perfect storm resulting from the constellation of four factors,” said Wayne Vroman, author of the brief and economist at the Urban Institute. “These factors are: a deep and prolonged recession, low reserves prior to the recession, the timing of the downtown, and low levels of employment through 2011.”

According to the brief, of the 53 UI programs (the 50 states plus the District of Columbia, Puerto Rico, and the Virgin Islands), 36 have secured loans from the U.S. Treasury since 2007 and 28 had outstanding Treasury loans that totaled $37 billion. States set UI tax rates that are paid by employers on a tax base that is required to cover at least the first $7,000 of workers’ wages, a figure that has remained unchanged since 1983. (For comparison, Social Security taxes are paid on wages up to $106,800.) While 16 states have a tax base that automatically goes up each year with average wages, 35 states do not automatically adjust their UI tax bases.  The states that do not automatically adjust their UI bases are more likely to borrow from the federal government (29 out of the 35 did so since 2007). As a result, states that do not automatically adjust their UI tax bases are more likely to face revenue shortfalls during times of high and prolonged unemployment, and must consider policy options to rebuild trust fund balances.

Although individual states have responded to trust fund deficits in a variety of ways (including higher taxes, reduced benefits, and restricted eligibility), the majority of states with outstanding loans are waiting for new federal policy actions.  Three major legislative proposals have been introduced, two of which include options to increase the federal tax base from $7,000 to $15,000.  “It is clear that higher tax bases are associated with improved long run-solvency,” said Vroman. “But is that sufficient to address the long-run financing problem in the states? Given the large scale of the financing problem and the reluctance of many states to take aggressive actions to improve solvency, it may be time to consider broader reforms.”

Download the full brief here.