Experts warn that the unemployment insurance program is not adequately prepared for a recession.

• Over the past year, the U.S. unemployment rate has risen, stoking fears of a recession.
• During the Covid-19 pandemic, the unemployment insurance program was overwhelmed by a surge of claims, causing it to collapse.
• The unemployment benefits system may not be able to handle the next economic downturn, according to experts.

Renewed fears of a U.S. recession have put a spotlight on unemployment.

If another economic downturn occurs, the system that workers rely on to collect unemployment benefits may collapse, as it did during the Covid-19 pandemic, experts warn.

Michele Evermore, a senior fellow at the Century Foundation and former deputy director for policy in U.S. Labor Department's Office of Unemployment Insurance Modernization, stated that it is not ready for the next recession.

She stated that we are currently in a worse condition.

During economic downturns, unemployment insurance aids laid-off workers by providing temporary income support, which in turn helps maintain consumer spending and the overall U.S. economy.

The National Academy of Social Insurance's recent report revealed that the pandemic exposed "major flaws" in the system, including "massive technology breakdowns" and an administrative structure "unprepared" to handle benefit payments promptly and accurately.

The report, authored by over 25 unemployment insurance experts, reveals significant variation among states in terms of program administration, including benefit amount, duration, and eligibility.

During a webinar about the NASI report, Andrew Stettner, the deputy director for policy in the Labor Department's Office of UI Modernization, stated that the pandemic brought to light the existing difficulties in the UI program.

Despite being lower than its pandemic-era high, the U.S. unemployment rate has gradually increased over the past year, causing concerns about a possible recession.

Stettner advised policymakers to address the system's shortcomings during good times to ensure it can deliver during bad times.

Why the unemployment insurance program buckled

Joblessness ballooned in the pandemic's early days.

In April 2020, the national unemployment rate reached its highest point since the Great Depression, which was the worst economic crisis in the history of industrialized nations.

The number of unemployment claims surged to over 6 million in early April 2020, compared to about 200,000 the week prior to the pandemic.

States were ill-prepared to handle the deluge, experts said.

The CARES Act mandated unemployment offices to implement new federal programs to improve the system. These programs increased weekly benefits, prolonged their duration, and provided assistance to a broader group of workers, including those in the gig economy.

When it was discovered that criminals were stealing funds due to the allure of greater rewards, states had to implement stricter fraud prevention measures.

Thousands of people experienced severe financial stress due to the extremely delayed benefits, while others struggled to reach customer service agents for assistance.

Years later, states haven't fully recovered.

The Labor Department typically considers benefit payments to be prompt if they are issued within 21 days of an unemployment application. However, this year, only about 80% of payments have been timely, compared to approximately 90% in 2019, according to agency data.

According to Indivar Dutta-Gupta, a labor expert and fellow at the Roosevelt Institute, it is crucial to establish a system that can withstand the "worst part of the business cycle."

Potential areas to fix

The National Academy of Social Insurance's experts highlighted several areas that require policymakers' attention for improvement.

The report stated that "cascading failures" occurred due to the low funding of administration and technology during the pandemic, which was at a 50-year low.

The federal government may increase the tax rate on employers, which currently funds today's system at $42 per employee annually, according to a report.

By optimizing mobile access and allowing workers to access portals 24/7, states could modernize outdated technology with the help of funding. This would also make it easier to pivot in times of crisis, experts said.

State systems have deteriorated due to the "biggest challenge" of financing, according to Dutta-Gupta.

A warning sign for the labor market is this data trend. A soft landing is still a possibility. The average consumer now carries $6,329 in credit card debt.

Evermore, a NASI report author, suggested that policymakers should consider implementing more consistent rules regarding the length, amount, and eligibility of benefits.

Different states employ varying formulas to assess eligibility for aid and calculate weekly benefit payments.

In the first quarter of 2024, the average American received $447 in weekly benefits, which replaced approximately 36% of their weekly wage, as per U.S. Labor Department data.

The benefits vary greatly among states, with the differences mainly due to the formulas used to calculate benefits rather than wage disparities between states, according to experts.

In June 2024, the average Mississippi recipient received $221 a week, while those in Washington state and Massachusetts got approximately $720 a week, according to Labor Department data.

The report stated that 13 states offer less than 26 weeks, or six months, of benefits. There is a call for a 26-week standard in all states.

Some proposals have suggested increasing weekly benefit amounts by 50% or 75% of lost wages, as well as providing additional funds for dependents.

There are reasons for optimism, Evermore said.

In July, a bipartisan group of 11 senators, including U.S. Senate Finance Committee Chair Ron Wyden, D-Oregon, and ranking committee member Sen. Mike Crapo, R-Idaho, proposed legislation to reform the unemployment insurance program.

"Evermore expressed optimism about the bipartisan will, stating that "We need another grand bargain before another downturn.""