Unemployment Insurance in US – State reserves are not adequate before COVID-19

The federal-state unemployment insurance (UI) system pays temporary partial earnings replacement to involuntarily unemployed applicants while they are actively seeking reemployment. The UI system is an automatic stabilizer for state economies, injecting spending from benefit payments quickly in economic downturns, and withdrawing spending during business recoveries because of fewer beneficiaries and higher tax contributions. There is now an increasing risk of recession in the near future. This raises questions about whether state UI systems are adequately prepared for another dramatic increase in benefit payments.

Regular unemployment insurance (UI) benefits are paid from reserves held in state accounts at the U.S. Treasury. The Great Recession exhausted the majority of UI reserve accounts, and not all states have rebuilt reserves. We examine the adequacy of current state and systemwide UI reserves to weather a mild, moderate, or severe recession in the coming months. Our results suggest that a recession as severe as the average of those occurring since 1975 would cause 18 states to exhaust UI reserves. Our simulations account for the fact that several states have cut benefit generosity since the Great Recession ended. Results suggest that despite federal incentives for forward funding, reserves are insufficient in many states. By accepted standards, state benefit provisions are not excessive, but state-imposed constraints on financing make the system slow to recover from debt. We suggest modest actions for UI financing reform.

Chosen excerpts by Job Market Monitor. Read the whole story @ “State Unemployment Insurance Reserves Are Not Adequate” by Christopher J. O’Leary and Kenneth J. Kline