A recent panel discussion on the country’s unemployment insurance system concluded that the program was too outdated and too underfunded to handle the needs of those struggling in this current economic climate.

The discussion, held last week in Washington D.C., by the policy think tank the Urban Institute, featured employers, labor attorneys and policy experts who viewed the way most states around the country pay for and provide unemployment compensation as being insufficient toward meeting the demands of the estimated 10 million Americans who have received benefits over the last four years.

“If you look at the 50 states plus the District of Columbia, since the onset of the Great Recession, 35 of the 51 jurisdictions have had to take loans from the U.S. Treasury to continue to make benefit payments,” said panel member Urban Institute Senior Fellow Wayne Vroman.  

Vroman contended many states were not prepared financially to pay unemployment compensation over the long-term, adding that many went into the recession with low reserves in their unemployment insurance trust funds and taxed at rates too low to compensate for the amounts being spent.

According to data from the U.S. Department of Labor, Illinois began borrowing from the federal government to cover its unemployment benefits back in July 2009, and has a current outstanding loan of more than $2.4 billion. In all, 29 states currently have outstanding federal unemployment compensation loans totaling more than $39 billion. Unlike in other advanced countries, unemployment insurance in the U.S. is a joint federal-state system where each state operates their own individual program – determining such things as eligibility requirements and the amount of benefits paid – within a broad set of federal guidelines.  

Funding for the system has come from taxing a portion of an employee’s wages, which according to Vroman, has been part of the problem since many states for years have kept the rate at which they have taxed too low even during good economic times.  

Since 1983, the federal minimum states could tax wages has been $7,000. States that have stayed relatively close to the federal minimum - such as Illinois where only the first $13,000 of a worker’s wages are taxed - have seen their unemployment trust funds depleted during the recession, and have been among the nation’s biggest borrowers.

By contrast, those states that have taxed wages at a higher rate — such as Washington, where the first $38,000 of a worker’s wages are taxed — have either not had to borrow or have borrowed significantly less during the past four years.

In terms of making the system solvent, the panel agreed an increase in contributions would have to be made, with many suggesting states turn to indexing – making yearly adjustments to – their taxable wage base.

“States that have an indexed taxable wage base in their UI [unemployment insurance] programs have gone through the recession much more successfully in terms of not having to borrow or borrow as much from the [U.S.] Treasury compared to the other states that do not have an index taxable wage base,” Vroman said.

Instead of raising tax rates however, many states have opted to cut costs by reducing UI services through a number of austerity measures, including establishing more stringent eligibility requirements to make it more difficult to receive benefits, or by reducing the 26-week maximum period that a person could receive benefits.

“I would argue that you’re never going to get to solvency by cutting benefits,” said panel member Matt Harvill, vice president for unemployment compensation with Kelly Services, Inc. “The reality is that if you’re going to truly turn solvency into the system, a $7,000 taxable wage base with a maximum rate of 6.2 percent is not going to get you there to solvency.”

But any proposal to raise taxes in order to better fund unemployment compensation would likely be a hard sell in any state legislature these days, as more local, state, national, and international governments trend toward cost-cutting measures such as layoffs and cuts to social services to address their budget concerns.  

Part of the problem, as panel member National Employment Law Project Staff Attorney Rick McHugh saw it, was that much of the rhetoric coming from Washington regarding the unemployment insurance system made it nearly impossible for lawmakers to even begin discussing ways in which the program could be improved.  In February, Congress, after months of fighting between Democrats and Republicans, finally authorized to extend unemployment insurance benefits throughout the rest of the year; just a couple of weeks before they were scheduled to expire.

“A lot of people, including public officials, don’t understand the distinction between public assistance and unemployment compensation,” McHugh said in a phone interview with Progress Illinois. “I think having a more vibrant safety net for people who are farther down the economic ladder is also a good thing for the overall society as well as for those people that would be helped, but I also think that making sure that unemployment insurance is tied to labor-market participation and is viewed as something that is an earned benefit for the recipient is important for the long-term survival of the program.”

Statistics from the Illinois Department of Employment Security, the agency that runs the state’s unemployment insurance program, showed residents received UI benefits for an average of 19 weeks in 2011, which was down from the 2010 average of 21 weeks. The total number of claims filed for unemployment benefits also went down to around 763,000, compared to 863,000 in 2010. Last year, the state spent more than $2.4 billion in UI payments, leaving a total UI trust fund balance of $72.49 by year’s end.