Unemployment Insurance: Problems and Prospects

Summary:  In 2011, three years after the Great Recession began, state unemployment insurance (UI) programs are in their worst financial position since they were established by the Social Security Act of 1935. While benefit outlays from the UI program have helped stabilize incomes for millions of families and provided a boost to the economy’s aggregate demand, net UI trust fund reserves have declined sharply. The current financing problems occur because reserves were low before the Great Recession; deep and prolonged unemployment further reduced revenues and increased outgo. In the 16 states that index their taxable wage base to keep pace with average wage growth, UI reserves are more adequate and most such states have avoided the need to borrow from the federal government. The federal taxable wage base used to collect federal UI taxes has remained at $7,000 since 1983. (In contrast, the Social Security OASDI tax base is $106,800 and is indexed to grow with average wages.) This brief discusses causes of the unprecedented prevalence and scale of borrowing by state UI programs during and after the Great Recession and considers current legislative proposals to improve solvency of these UI programs.