Pushed to the Limit: How federal unemployment insurance boosts have strained state trust funds

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In early 2020, the COVID-19 pandemic caught policymakers at all levels of government by surprise. As many states began to shut down their economies, Congress responded to rising unemployment with the CARES Act, which contained a substantial expansion of unemployment insurance (UI). Conventional work search requirements for UI were suspended, new classifications of workers were made eligible for benefits overnight, the duration of benefits was increased, and an unprecedented $600-per-week bonus was added to unemployment checks.

Unfortunately, this bonus wreaked havoc on the recovery and the unemployment system’s finances. Individuals could collect substantially more in unemployment benefits by staying home than they could earn returning to work. Two-thirds of small business owners reported that they were worried their employees would not return because they would make more on unemployment, making it harder for them to reopen. The Department of Labor estimated that waste, fraud, and abuse in the unemployment system have increased tenfold.

Although federal taxpayers covered the cost of the weekly bonus, states’ UI trust funds have plummeted as unemployment claims skyrocketed due to this unprecedented bonus. Worse yet, the UI boost further discouraged work and enabled states to remain closed.