The U.S. Congress has enhanced and extended the employment insurance (UI) in response to the Covid-19 economic downturn. [1] The UI system, however, has performed poorly as a safety net long before the 2020 pandemic. Troubled by decreased revenues, blowing debt, and inadequate effect, the U.S. unemployment insurance system requires a significant overhaul.

The current UI system does not have sufficient sources of revenue. The UI receives funds through taxes on wages. The taxable wage base for the UI has not changed since 1982. It has also not adjusted to annual inflation. As a result, the percentage of wages taxable for the UI has declined ever since. Currently, less than 30% of all national wages serve as tax bases for the UI. [2] This decline of taxes, however, has not affected everyone equally. The UI tax is not only insufficient but significantly regressive. The UI tax rate stands at over 2.5% for the bottom quarter of the wage distribution, but less than 1% for the top quarter. [3] Therefore, the insufficient UI tax disproportionately burdens the most vulnerable in the labor force.

As a result, the current UI system is indebted and unstable. While the destabilization and depletion of the UI system started in the 1980s, the damage significantly worsened after the 2008 recession, when the UI systems in many states went into deep insolvency. By 2011, the national UI systems had a combined debt of $41.6 billion. That number represented about 94% of the UI tax revenues. [4] By 2016, the UI depends on a combination of loans from the U.S. Treasury Department and the private bond market. By then, the entire fund pool had recovered to about 59% of the pre-2008 level (which was not ideal, to begin with). [2] As a result, the UI system remains fragile and unlikely to respond well to any economic shocks (let alone one to the magnitude of 2020). Thus, the UI system has been and will continue to represent an unstable system.

The weakness of the system has visible impacts on the people in need. Before the 2020 economic downturn, the percentage of UI recipients among unemployed people showed a significant decline. By 2016, the recipiency rate remained at 75% of the pre-2008 level. While many factors contributed to the decline, two causes stand out. First, the average duration of unemployment has steadily increased. With more people out of work for longer periods, many lost the time-limited unemployment insurance. Second, the very time limits for the UI have also become shorter in some states, perhaps as a result of the insufficient funding. [5]. Put the two pieces together, the UI system has become increasingly unhelpful to the unemployed workers in the United States.

The UI system represented an obsolete insufficient, yet consequential safety net. The problem has worsened since the start of the Covid-19 pandemic but predates that crisis. Considering its draining revenues, unstable functioning, and restricted recipiency, the U.S. unemployment insurance system needs major reform.

[1]. Iacurci, Greg. 2020. "Covid Relief Bill Offers 11 Weeks Of Extra Unemployment Benefits, $300 Boost And A Supplement For Some Gig Workers". Cnbc.Com. https://www.cnbc.com/2020/12/21/covid-relief-bill-extends-and-enhances-unemployment-benefits.html.

[2]. Stettner, Andrew. 2016. "Speeding The Recovery Of Unemployment Insurance". The Century Foundation. https://tcf.org/content/report/speeding-the-recovery-of-unemployment-insurance/.

[3]. Kling, Jeffrey. 2007. "Testimony Before The Subcommittee On Income Security And Family Support Of The House Committee On Ways And Means". The Brookings Institute. https://www.brookings.edu/wp-content/uploads/2016/06/kling20070919-1.pdf.

[4]. Vroman, Wayne. 2012. "The Challenge Facing The UI Financing System". The Urban Institute. https://www.urban.org/sites/default/files/publication/25701/412629-The-Challenge-Facing-the-Unemployment-Insurance-Financial-System.PDF.

[5]. Vroman, Wayne. 2018. "Unemployment Insurance: Benefits Performance Since The Great Recession". The Urban Institute. https://www.urban.org/sites/default/files/publication/96806/unemployment_insurance_benefits_performance_since_the_great_recession_2.pdf.