When the Tide Goes Out: Unemployment Insurance Trust Funds and the Great Recession, Lessons for and from New England
The unemployment insurance (UI) program is a federal-state program aiming to: (1) provide temporary, partial compensation for the lost earnings of individuals who become unemployed through no fault of their own and (2) serve as a stabilizer during economic downturns by injecting additional resources into the economy in the form of benefit payments. Each state, plus the District of Columbia, Puerto Rico, and the Virgin Islands, operates its own UI program within federal guidelines.
Since the onset of the Great Recession in late 2007, two-thirds of state UI programs depleted their trust funds and borrowed from the federal government in order to continue paying benefits to unemployed workers. This research examines why some state UI programs experienced insolvency during the Great Recession or in its aftermath while others did not. It places special emphasis on New England, describing the key features of the region's UI programs and examining the solvency of their trust funds over time, as well reforms enacted in these states that impact solvency. It concludes by offering policy options for strengthening UI trust fund solvency in the future.
- During the Great Recession, at least 35 states borrowed at some point to maintain fund solvency. As of 2012, 29 still had outstanding loans totaling $39 billion.
- There is a strong relationship between a state’s borrowing activity during or after the Great Recession and the financial status of its trust fund at the start of the downturn.
- The states that borrowed most heavily also faced higher unemployment, on average, than other states. All the borrower states had, on average, lower ratios of taxable to total wages than states that did not take out loans, but the borrower states did not necessarily have more generous unemployment insurance benefits.
- An erosion of a state’s taxable wage base—that is, the portion of an employee’s wages that is subject to unemployment insurance taxes—appears to have been an important contributing factor to the solvency issues faced by many states during the Great Recession.
- Unbalanced reforms—that is, those that cut taxes without reducing benefits or those that increase benefits without also raising tax revenues—as well as low trust fund targets also contributed to solvency problems in some states.
- With the exception of Maine, which undertook pro-solvency reforms in the late 1990s, all of the New England states experienced UI trust fund insolvency since the onset of the Great Recession.
- Recommended measures to strengthen long-term UI solvency include: 1) increasing and indexing the taxable wage base, 2) avoiding unbalanced reforms, and 3) re-examining employer tax rates.