The nation’s Unemployment Insurance (UI) system has long been distinguished from welfare and other public benefits in that its benefits are supported by payroll taxes credited to federal and state trust funds. Those payroll taxes are technically paid by employers, but economists generally regard workers as paying for them in the form of lost wages. Workers certainly believe they paid into the system to earn the benefits they collect when laid off. But the federal side of this system is increasingly a different matter.
State UI benefits currently average $368 per week nationwide and are typically payable for up to 26 weeks. When times are good, state trust funds build up as state payroll tax revenues rise and fewer benefits flow out. But in recessions, trust funds shrink and sometimes are completely drained, leading some states to borrow from the federal government to continue making good on benefit promises. As of July 29, seven states (California, Colorado, Connecticut, Illinois, Massachusetts, New Jersey, and New York) had outstanding loans totaling over $30 billion. If a state doesn’t repay its loans, federal payroll taxes there automatically rise.
That’s just one reflection of how state UI trust fund balances matter. The US Department of Labor (DOL) also releases an annual solvency report grading each state on whether its trust fund can withstand a future recession. DOL’s data dashboard website displays trust fund reserves over time and current state solvency levels. Some lawmakers want to go beyond just scrutinizing state balances. For example, a 2021 proposal from Senate Finance Committee Chairman Ron Wyden (D-OR) and Sen. Michael Bennet (D-CO) contemplates “new solvency requirements” requiring many states to maintain higher balances—funded by higher taxes.
But when it comes to the federal UI trust
funds, none of that scrutiny applies.
DOL’s annual solvency report doesn’t even mention the three federal trust funds, which support administrative expenses, loans to states, and extended benefit costs. A “chartbook” on the DOL data dashboard, described as being “used in current economic analysis of unemployment trends in the Nation,” lists balances in the federal trust funds—most recently updated for 2009! Pretty much the only time anyone focuses on the federal trust funds is when they reach their ceilings and “surpluses” are returned to the states. That last happened in 2002, and there’s little chance of a repeat anytime soon.
Official data suggest two of the three federal trust funds currently have positive balances. For example, the Extended Unemployment Compensation Account (EUCA), which covers federal extended benefit costs under a permanent federal/state program, has a reported balance of $2.6 billion. However, that balance ignores tens of billions of dollars the federal government spent on extended benefits during the pandemic—on a far larger scale than occurred in prior recessions. The March 2020 CARES Act created a new temporary federal extended benefits program called Pandemic Emergency Unemployment Compensation (PEUC). Under that law’s “financing provisions,” funds in EUCA “shall be used for the making of payments” under PEUC. But the “general fund of the Treasury” first transferred the money needed to do so to EUCA, meaning the federal trust fund bore none of the actual costs. To date, $85 billion has been spent on PEUC that way. And almost $600 billion has been similarly transferred to the various federal UI trust funds before being spent on other CARES Act benefits. That dwarfs the roughly $200 billion in state benefit spending during the pandemic.
If the federal side of the UI system operated anything like the state side, federal UI payroll taxes would have to rise—massively—to cover those costs. But that’s not the way the system works. Instead, the federal trust funds roll right along as if nothing happened, the federal payroll tax stays the same no matter how much the system spends, and hundreds of billions of dollars are simply added to the federal debt. Meanwhile, the Wyden/Bennet proposal suggests—without a hint of irony—policies designed to ensure that states “keep their Unemployment Trust Fund accounts solvent.”
Lawmakers should first consider whether the federal side of the UI system is solvent in any meaningful sense. In reality, policies crafted by both Republicans and Democrats have left it increasingly dependent on federal general revenues and deficit spending, instead of the system’s trust funds and the payroll taxes that backstop them. That means the federal side of this system increasingly offers something more akin to welfare or stimulus checks, and not the type of benefits laid-off workers believe they have paid for. Understanding that trend and its many implications is critical, especially as policymakers consider proposals to make massive federal pandemic benefits permanent.
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