Spending now to modernize the unemployment system would save money later
By Editorial Board,
NO ASPECT of the federal response to the coronavirus pandemic has done more good for more ordinary Americans than the substantial expansion, both in duration and dollars, of unemployment insurance (UI) benefits under the Cares Act. Recently renewed by Congress, these programs helped those made jobless through no fault of their own, including “gig” workers such as ride-share drivers, recoup — and in some cases exceed — their pre-crisis earnings. Indispensable though it has been, however, the swift and sudden ramping up of unemployment insurance — at one point, weekly claims were coming in at 10 times the previous record weekly rate of 700,000 — exposed structural weaknesses in the system, including those that make it vulnerable to fraud.
And that fraud has indeed been costly. As Labor Secretary Eugene Scalia noted in a Dec. 14 speech, an “improper payment” rate of 10 percent is the historical norm for UI payments, which would translate to $38 billion of the $380 billion so far paid through the Cares Act. However, the actual figure “must be far larger” than that, Mr. Scalia observed, in part because computer-savvy fraudsters, often using personal identification information they have stolen from innocent third parties, were able to exploit the understaffed and technologically backward state agencies that are in charge of checking eligibility and determining payment rates.
The most notorious case was in California, where some $400 million was claimed, and paid, in the names of some 20,000 people who were not unemployed but incarcerated in state prisons and county jails. In Maryland, state officials uncovered what the office of Gov. Larry Hogan (R) called “a massive and sophisticated criminal enterprise” that made more than 47,500 fraudulent claims totaling half a billion dollars, out of $8.2 billion spent. Later, Maryland thwarted a UI scam that targeted Mr. Hogan himself for identity theft. Washington state has lost $300 million to UI fraud.
“Waste, fraud and abuse” is the perennial mantra of those who oppose using government resources to create a social safety net and blunt capitalism’s sharpest inequalities. Yet 2020’s UI fraud problem is not a story of inevitable corruption, but rather of the avoidable kind. And the best way to avoid it would have been to invest more in governmental capacity, both state and federal. The U.S. unemployment insurance system relies heavily on state governments, which, in turn, fund both administration of the program and benefits through a tax on employers. But they have little incentive to tap that tax base for investment in UI systems during good times, when jobless claims are few. The result is erosion of human capital and deferred modernization of computer systems.
The lesson is that sometimes government must spend money to save money. The top priority should be up-to-date software that enables states to calculate benefit levels more precisely and identify ineligible claims more swiftly. Congress and the states should tackle UI modernization urgently, remembering that the victims of fraud and other errors include not only taxpayers but also legitimate claimants who find their accounts blocked because identity thieves have been siphoning away their benefits. Reform to this vital section of the safety net can be postponed no longer.
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