The Unemployment Insurance System’s Lofty Intentions, Turned Troubles

When the Social Security Act of 1935 was enacted, a variety of provisions were put in place to keep the economy stable in times of hardship. One of those provisions was Unemployment Insurance (UI), of which one of the intentions was to reward employers with lower unemployment tax rates by minimizing workforce turnover. However, since that time, the UI system has grown to be more of a detriment to employers and the economy, becoming ever more complex and costly. It seems that since 1935, the lofty intentions for the Unemployment Insurance System have turned into troubles that are weighing down today’s economy and the everyday business owner.

Among the most glaring troubles with the UI system is its lack of payment accuracy. It has been reported by the United States Department of Labor, using the Benefit Accuracy Measurement (BAM), that in one financial quarter, an estimated $3.9 billion is improperly distributed to UI recipients. This number can indicate claims that were either overpaid, underpaid, or improperly denied. According to the data presented for 2016’s fourth quarter, an estimated $2.1 billion was overpaid, out of a total of $33.2 billion in payments.

Regardless of the UI system’s intention, that is a lot of money overpaid, and an even greater amount paid in general. Fortunately, there are methods that employers may undertake to counteract these inaccuracies, such as the software offered by Us4U. They offer solutions that help you manage, track, and most importantly audit your UI claims and charges in addition to maintaining the lowest tax rate possible.

However, to some extent the level of impact does depend on geography. Improper payments are a nationwide trouble, but some states manage UI differently, making it even more important that employers are aware of their rights and that their actions directly influence their unemployment tax rate. Unfortunately, some states struggle for accuracy more than others. The following graph, as provided by the United States Department of Labor, demonstrates how that level of trouble differs from state-to-state, and why employers in their given state should be more vigilant in how they manage their unemployment tax rate.

Unemployment UI Economy Employer Trouble Tax

Some have argued that UI encourages prolonged unemployment. One study suggests that providing these benefits extends the amount of time an individual remains unemployed, which in turn would keep everyone’s UI tax rate higher.

A 1999 article on unemployment and the troubles it generates in regard to prolonging the situation, by Larry Summers (former economic advisor to President Obama) states:

“First, government assistance increases the measure of unemployment by prompting people who are not working to claim that they are looking for work even when they are not. […] The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work.”

Although UI’s intentions may have been to benefit the unemployed and by extension be of assistance to the economy, legions of unemployed individuals for extended periods of time hurt U.S. employers by prolonging higher UI tax rates.

Apart from actively harming the economy and our employers, the current UI status is now preventing economic growth by being perceived as a safety net for individuals. People keep savings for a variety of reasons, including in case of job loss. This separate savings account, or emergency fund, allows people to have peace of mind in knowing that they have money to live off in the event of losing your job, for example. Deciding to look at places like GoFundMe can provide you with information on how to save money fast. From having a side hustle to crowdfunding, there are always options you can consider when it comes to saving enough money in your emergency fund. However, as a side effect of UI, people no longer feel as much need to save money and by extension do not have enough funds to invest. Individual savings are critical to the health of any economy. With the UI safety net in place, fewer people will invest in our businesses and the economy will remain stagnant.

If you are concerned that your UI tax rate may be too high or that you could be doing more to lower your UI tax rate, Unemployment Solutions for You, LLC may be able to help. For more information, please visit our website, or call us toll free at 800-928-5750.

Unemployment Solutions For You Joined EY on May 20, 2022.

The information on this website is accurate through May 20, 2022. It has not been updated to reflect the transaction.