Overpayments in the U.S. unemployment insurance system have received increasing attention of late. For example, CNN.com cited a recent study by the Department of Labor in reporting that 11 percent of all unemployment benefits were overpayments. Overpayments can be the result of errors on the part of government administrators, employers, and employees or it can be outright fraud.
First we examine the benefits the U.S. unemployment insurance system has paid out from 1989 to 2011. Next we look at the overpayments for the same time period. Finally, we discuss a fact that is less well-known: Not everyone who is eligible for unemployment benefits actually collects them. Over the longer horizon, these unclaimed benefits are much larger than the overpayments that have received recent attention.
Unemployment insurance programs insure workers against the risk of lost income if they lose their job through no fault of their own. In the U.S., the program is run at the state level. Each state sets its benefit level and eligibility criteria and finances these benefits through payroll taxes. There are three primary criteria for eligibility: First, the individual must have accumulated enough earnings or worked a minimum number of weeks during the previous year. Second, only those who lost their job through no fault of their own are eligible; thus, people who quit their job or are fired because of poor performance are not eligible. Third, the duration of benefits is limited.
Typically, unemployment benefits last for a maximum of 26 weeks. These regular unemployment benefits paid by the states increased sharply during the recent recession. Measured in 2005 dollars (all amounts are reported in 2005 dollars), these benefits more than doubled, from $31 billion in 2007 to almost $72 billion in 2009. Since 2009, these regular benefits have decreased to levels below what they were after the previous recession: In 2011, the unemployment insurance program spent less than $42 billion on regular benefits, while the corresponding figure in 2002 was more than $46 billion.1
In periods of high unemployment, benefits may be continued beyond the typical cap of 26 weeks. Most states offer an additional 13 weeks of benefits when the unemployment rate in that state remains above a certain threshold. The federal government may also finance more benefits. For example, the federal government recently provided financing to some states to extend their benefits to a maximum of 99 weeks. During the early 1990s, extended unemployment benefits added 60 percent on top of the regular 26 weeks of benefits. During the past two years, the extended benefits have added more than 125 percent.
Some unemployment benefit payments have indeed been overpayments, as recent newspaper reports suggest. Figure 1 illustrates the amounts overpaid. The average overpayment as a fraction of benefits during 2007-2011 was 11 percent. For example, during the middle of the recent recession in 2008, total unemployment benefits were $40 billion and total overpayments were $4 billion.
The overpayments could stem from simple typographical errors on one extreme to outright fraud on the other extreme. For example, an individual’s benefit may be inadvertently set too high because the wrong formula was applied. This represents a simple error. Fraud, on the other hand, is a deliberate act. During 2007–11, overpayments due to fraud accounted for 25 percent of all overpayments and 3 percent of all payments on average (see Figure 1). Put differently, overpayments due to fraud were roughly a fourth of the total overpayments.
The Benefit Accuracy Measurement (BAM) program run by the U.S. Department of Labor classifies fraud in 28 categories. The dominant form of unemployment insurance fraud in recent years is what’s classified as “Concealed Earnings” fraud: collection of unemployment benefits by individuals who are gainfully employed. As Figure 2 illustrates, overpayments from Concealed Earnings fraud have been steadily rising over the past 22 years and were almost 70 percent of the overpayments due to fraud in recent years.
Recent headlines on prisoners collecting unemployment benefits fall under “Unable and Unavailable to Work” fraud. This category includes cases where an unemployed person is not healthy enough to work or is in school, for example. Overpayments due to the entire Unable and Unavailable to Work category amounted to barely 5 percent of fraud in 2011.
Meanwhile, overpayments due to “Insufficient Job Search” (cases where the unemployed individual did not, but claimed to meet the mandatory work search requirement, such as the minimum number of job applications to be filed each week) have been declining and are down to less than 5 percent of fraud.
Some unemployed persons never seek benefits. Although overpayments have grabbed recent headlines, only 35 percent of the unemployed have been collecting benefits over the past 22 years on average. Not all of these people are eligible to collect benefits, however. For instance, the typical duration of unemployment benefits is 26 weeks, and a person who continues to be unemployed past 26 weeks is not eligible.
During the recent recession (2007-09), roughly 50 percent of those eligible were collecting benefits. The fraction increased to 95 percent in 2011. In Figure 3, we illustrate the number of people who could have collected unemployment benefits but chose not to do so.
Figure 3 also illustrates a back-of-the-envelope calculation. If all of those who are eligible to collect unemployment benefits were to indeed collect the benefits, what would be the additional expenditures for the unemployment insurance program? The additional expenditures in 2009, toward the end of the recent recession, would have been a whopping $108 billion. As Figure 3 illustrates, the overpayments in 2009 were $11 billion. On average, more unclaimed benefits are left on the table than improper benefits taken off the table.
Looking at the unemployment insurance program over the longer horizon, overpayments are less than one-tenth of the benefits paid, overpayments due to fraud are less than 3 percent of the benefits paid, and unclaimed benefits are nearly seven times the overpayments. Although reducing the overpayments would clearly help reduce the expenditures for the unemployment insurance program, a higher fraction of eligible people choosing to collect unemployment benefits would significantly increase the expenditures for the program.