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Unemployment: Make Unemployment Insurance Equitable for the Long Haul

By Marie-Frances Rivera and Phineas Baxandall, Massachusetts Budget and Policy Center

March 5, 2021

Since March 2020, Massachusetts workers have faced a dark winter. At the recession’s deepest point, employment had fallen by nearly a quarter. As COVID-19 infection rates increased and a pandemic-induced recession began, our Unemployment Insurance (UI) system stabilized our economy. Over 2020, $20.5 billion in state and federal unemployment payments flowed into the Massachusetts economy, providing critical support to over a million individuals and their families, including many Black, Latinx and low-income workers who were hit hardest by job loss.

While this federal/state program is indispensable for keeping individual workers and the general economy from ruin, as currently designed it is in peril and leaves too many workers out. The surge in pandemic unemployment exposed major shortcomings in our UI system. For example, for too many years, lawmakers have refused to allow automatic safeguards to go into effect that increase payroll contributions to the state UI fund when its balance falls too low. Putting off such adjustments has made Massachusetts’ UI fund insolvent and forced us to borrow from the federal UI fund an amount expected to exceed $2 billion by the end of 2021. Each year that we put off raising contribution levels puts us deeper in the red, and employers will be required to start paying interest on the debt. The state and federal government can fix these problems.

Fortunately, federal enhancements to unemployment assistance have played a strong role in preventing an economic tailspin and protecting workers against losses of employment income unprecedented since the Great Depression. Our federal government paid for $600 weekly additions to UI benefits (that lapsed and then became $400 weekly), and funded new benefits for independent contractors, gig workers and many others who wouldn’t normally qualify.

Only the federal government has the financial ability to keep UI strong until this crisis is over. So it must keep enhanced COVID unemployment benefits flowing until the economy stabilizes—rather than setting them to expire at some arbitrary date, when unemployment could still be high. When these emergency programs eventually do wrap up, we should not return to a world in which the workers who have received these supports would again be excluded from them. Gig workers especially need to be brought into a broader UI system.

Similarly, the system must provide UI benefits to workers regardless of immigration status, especially as payments have already been made into the UI system on behalf of these workers. In Massachusetts an estimated $366 million in unemployment insurance contributions have been paid on behalf of approximately 113,000 undocumented workers over the past decade, but these workers are unable to collect a penny of benefits through either the traditional UI system or the Pandemic Unemployment Assistance (PUA) program.

Many of the problems in the Commonwealth’s UI system are of our own making, and we need to take action to fix them. Here are three reforms:

  • Provide supports to workers left out of UI. If the federal government does not address the problem, the state can create separate programs to provide targeted help to undocumented workers and can define eligible “employees” to ensure that contractors and regular gig workers are brought into the system. For instance, California’s new $600 state stimulus provides benefits to undocumented immigrants; California, Colorado, and now Maryland have extended their respective state’s Earned Income Tax Credit to low-income households who don’t qualify for UI because they have mixed immigration status or lack a social security number. The state can also clarify that companies like Uber, whose workers were covered during the pandemic, must contribute to UI and other social insurance like other employers.
  • Restore solvency. Commitment to practices that ensure contributions will become sufficient to keep the program afloat. The federal government may ease up on requiring states to pay interest on their debt, at least during the pandemic, but employers are going to need to get back to fully funding a robust system. The Governor’s plan pays off the immediate debt and additional shortfalls through 2025, but does so by borrowing up to $7 billion from private lenders and then charging employers to pay it back over the next 30 years. It doesn’t restore reserves or the rate schedules needed to be prepared for the next downturn.
  • Widen the base. While payroll contributions will need to eventually rise enough to restore solvency, a wider “rate base” can cushion the blow and improve fairness and resilience. Massachusetts currently collects all payroll contributions based only on the first $15,000 of a worker’s wages. That means that for a worker earning $30,000, taxes are paid on half their wages, while for a worker earning $150,000, taxes are paid only on their first 10% of wages. As a result of this narrow base, overall UI tax rates must be higher on each dollar of eligible wages and it typically disfavors smaller businesses and those in poorer communities where wages are lower. State UI rules should change so that if lawmakers don’t increase the rate, then they must increase the base to ensure enough funding to remain solvent. This will protect smaller businesses and lower-income workers who tend more often to be Black, Latinx and Indigenous people. To start this transition, the taxable wage base for UI should be inflation-indexed, starting this year.

Greater equity goes hand in hand with a stronger, more resilient unemployment insurance system. The same could be said for our economy overall.

Read more proposals in the Seizing the Moment series.