Unemployment insurance offices nationwide are being hit with a tidal wave of historic proportions. They have typically processed about 220,000 initial claims each week in recent years. In the worst week of the Great Recession they processed just shy of 1 million. We expect the data to show that they received over 3 million initial claims last week. This week will almost certainly be even higher.
The coronavirus claims will create a backlog that could take weeks or even months to work through, at a time when we desperately need the benefits to go out quickly to sustain families. Moreover, the relief bills currently under consideration in the House of Representatives and the Senate will deliver a large part of the aid through expansions of unemployment benefits, making it all the more important that the system handle claims quickly.
The unemployment insurance processing system is not prepared for this hundred-year flood. It has been starved of investment for decades: Federal funds to states for administering UI fell by 30 percent between 1999 and 2019. As a result, the system is held together with duct tape and struggles even with normal recession-time claims levels; it is wholly unprepared to accommodate the current surge. Processing claims requires assessing them for eligibility and this is time consuming, usually requiring human involvement.
Desperate times call for desperate measures. There is a way to handle the spike in claims, get benefits out quickly, and ensure that public dollars are not wasted on invalid and inappropriate claims. Unemployment offices should presume that all applicants are eligible and prioritize paying claims without careful review. Then, when the initial wave is past and there is more breathing room, they should go back and review the claims, and, if necessary, collect overpayments.
Here’s how it would work: the first step the UI offices should take when confronted with a new, seemingly valid claim is to pay it, using a rule-of-thumb estimate of the benefit amount if this can be done faster than a more careful calculation. When they are able, they will go back and review eligibility more carefully. Paid claims that are found to have been eligible are fine – there is nothing more to do. When a claim is found that should not have been paid, the recipient should be notified and the UI office should calculate the amount of excess payment. When it issues tax forms next winter – anyone who receives unemployment benefits gets a 1099-G that is used for reporting UI benefits on the tax returns – these forms should note the overpayment. The recipient would then be liable for repaying the excess, when the crisis has hopefully receded. The federal government should provide additional processing resources to states that adopt the streamlined process.
This is not a perfect system. Many people will wind up owing money through honest mistakes or simply because they did not understand the extremely complex unemployment insurance rules, and paying a large tax bill, months after the money was spent, can be a big burden. People whose claims were denied would, as always, have an option to appeal. Beyond this, the tax bill shock could be mitigated by allowing individuals to repay over the course of several years, with repayment relief for lower income families. It may not be possible to collect every penny that is owed. This is a small price to pay to ensure that unemployment benefits go out quickly in this crisis. The damage to family pocketbooks and to overall demand in the economy from a bottleneck in the UI payments system will magnify the already catastrophic unemployment crisis, and the value of limiting them dwarfs the costs of overpayment during this crisis.
Last, it is important to note that this is not a substitute for investing substantial additional dollars in unemployment insurance program capacity, as is included in the bills currently under consideration. The offices will need this funding to process the wave of claims, even under our proposal. We also need to modernize the systems to handle later phases of this wave, and to prepare for the next one. In the meantime, our proposal is an expedient response to the current emergency and will help to limit the damage that the current unemployment crisis will cause.