TCF senior fellow Michele Evermore and fellow Laura Valle Gutierrez submitted a written statement for the record to the House Ways and Means Committee for a hearing on February 8, 2023 regarding unemployment fraud. Their statement, which you can read below, describes how the under-resourcing of the unemployment system opens the window for criminals seeking to defraud the government or steal benefits directly from taxpayers.
Everyone involved in unemployment insurance (UI) policy wants to ensure that no funds fall into the hands of fraudsters. Fraud in the system hurts everyone. Unfortunately, criminals are currently stealing benefits directly from unemployed workers in need through tactics such as bank account hijacking, with the stolen money ending up in the hands of people who use it for nefarious purposes.
Taxpayers into the unemployment system should not be on the hook for payments to fraudsters. But as experience during the pandemic demonstrated, underfunded systems can fail on many fronts due to a confluence of stressors. That is why people who care about the UI program paying the right benefits, to the right people, on time need to come together to find constructive solutions to ensure that the fifty-three states and territories that participate in UI all have systems that can withstand all of the challenges that could arise.
This report will review the purpose, experience, and challenges of the unemployment insurance system during the pandemic, and then will focus specifically on the experience with fraud, offering solutions.
The Purpose of Unemployment Insurance
Unemployment insurance was included in the Social Security Act in 1935. On the heels of the Great Depression, the Roosevelt administration and Congress knew that they needed to address the extreme hardship that involuntary unemployment places on people, families, communities, and the economy. The program was intended not just to help workers who find themselves out of a job through no fault of their own, but also to prevent wider wage erosion by making sure that people have a reasonable amount of time to find a good replacement for their old job. The presence of a robust UI system also means that overall wages are less likely to decline as a result of mass layoffs, as workers will have the time and the means to plan their next steps.
As part of the funding for the program, states tax employers using their “experience rating,” which means that employers are charged at a higher rate if the number of their former workers using the UI system goes up. This particular mechanism was intended to be an additional disincentive to employers laying off workers, but in some cases serves to encourage employers to challenge their former employees’ receipt of benefits.
The program was also intended to provide macroeconomic stimulus during times of economic downturn. This is especially important when considering workers who are left out of UI—it is not just individual workers that suffer as a result of lost jobs, others in their community suffer from their inability to spend on necessities. In a way, people who have never lost their job should still be thankful for the UI program, and it may have preserved their jobs. That is, because every dollar spent generates far more than a dollar of local economic activity, UI programs help keep the rest of the community employed. This fact has huge equity implications, because when certain communities, such as communities of color, have a greater challenge in accessing benefits, these barriers keep that community from benefiting from that multiplier effect. In fact, job loss in a community when claimants cannot access a safety net causes that economic pain to spread.
Finally, the program keeps workers attached to the workforce by requiring that, in order to receive benefits, claimants are able to work, available for work, and actively seeking employment. An individual’s connection to UI benefits also facilitates connection to employment services and re-employment and retraining opportunities.
It is important to highlight what unemployment insurance is intended to do at the start of any conversation that could lead to change in the system. The UI program has served as an important check on economic downturns for nearly a century, and losing sight of the key functions it performs could jeopardize it. Program integrity includes fighting fraud, but it also means being able to pay the right benefits to the right people on time.
Pandemic Successes and Challenges
The headline story of the pandemic is that unemployment insurance did a lot of heavy lifting and a lot of good. More than 53 million people were able to access $870 billion in benefits. This resulted in an astoundingly V-shaped recovery. As these payments made their way through the economy, the unemployment rate declined from 14.7 percent in April to 13.3 percent in May and 11.1 percent in June of 2020. With all of the chaos surrounding a once-in-a-century global pandemic, recovery efforts kept the economic pain caused by the massive widespread shutdowns from infecting the entire economy.
However, without significant resources and attention, the nation’s unemployment system will not be able to sustain this level of positive impact. The system began 2020 with a fifty-year low in administrative funding, at which point states were expected not only to handle completely unprecedented claim filing, but also to create three entirely new programs in a matter of weeks. That low administrative funding meant that states had to kick-start programs on the cheap, with too few staff and using outdated technology—while simultaneously establishing their own pandemic work-from-home protocols.
In 2020, federal UI administrative funding flowing to the states amounted to $2.14 billion. Twenty years earlier, in 2000, that same funding was $2.2 billion, not adjusted for inflation (see Figure 1). Taking into account inflation and population growth, states were asked to do a great deal more work with already greatly diminished resources. Similarly, insufficient resources were provided for federal staff to support the Office of Unemployment Insurance, the group tasked with doing a tremendous amount of guidance, enforcement, assistance, and problem solving during the pandemic. The enacted levels of funding for program administration in the area of workforce security, which funds UI program staff in the U.S. Department of Labor’s national and regional offices, declined significantly, from a level of 419 full time positions in FY 2006 to only 168 in FY 2021.
These underresourced state systems were overwhelmed by historic challenges during the start of the pandemic. The spike in new claims was unimaginable. Previously, the highest level of new claims on record was 695,000, in October of 1982. While the first week in March 2020 saw only 211,000 initial claims filed, by the last week in March, the number of new claims filed had soared to an astounding 6.6 million. When Congress and the administration added three entirely new programs on March 27, the Department of Labor had guidance out within days. In response, states had the brand new, very complicated Pandemic Unemployment Assistance program up and running within thirty-eight days on average. However, due to program complexity, questions came up and the federal government issued clarifying guidance several times throughout the course of the program. There were bound to be mistakes.
It is understandable why the federal government made such a rapid and robust pandemic intervention. Entering into the pandemic, states had cut their systems so dramatically that they did not provide (1) enough benefits to (2) enough of the unemployed population for (3) a long enough period of time for the program to counter a recession. So the three programs that Congress passed dealt with each of these three problems. Federal Pandemic Unemployment Compensation (FPUC) added $600 per week to worker benefits to approximate 100 percent income replacement. Due to technical constraints, programming a 100 percent replacement was impossible, so FPUC was the difference between the national average weekly wage and the average weekly benefit amount. Pandemic Unemployment Assistance (PUA) was modeled on Disaster Unemployment Assistance (DUA) to cover the workers who were left out of regular UI coverage. Pandemic Emergency Unemployment Compensation (PEUC) solved the duration problem by adding additional weeks of benefits. Over the course of the programs, Congress amended these programs twice. First, additional requirements were added at the end of 2020, mostly aimed at preventing fraud, but also allowing states to waive overpayments in the PUA program if the claimant was not at fault and recovery of those overpayments would go against equity and good conscience.
While the federal intervention was successful in rescuing workers and the economy, it wouldn’t have been necessary if regular state UI programs paid the right people the right amount long enough for them to find suitable replacement work. This is why we need to reform the regular UI program so states cannot game the system and skimp on the regular program only to be topped up federally during a crisis. If there were adequate systems in place during the pandemic, and no chaos from having to set up new programs quickly, the opportunity for fraudsters would have been more limited.
When the economy is doing well, policymakers tend to ignore UI, and yet still expect it to go from zero to sixty without any gas in the tank once a downturn hits. But UI is incredibly complex, with so many differences in state programs that the U.S. Department of Labor publishes a book every year comparing the points in state laws that are at all comparable. Every aspect of determining eligibility is complex and different from state to state. These decisions, per the Social Security Act section 303(a), are supposed to be made by qualified state merit staff—in fact, this is the very first listed requirement of a qualified state UI agency. During the pandemic, however, this requirement was waived to allow a surge in staffing, and since then, state workers have repeatedly given testimony that these new surge staff, at best, took the time of more seasoned staff to get up to speed, and at worst, made mistakes that took additional time to correct. This is not the workers’ fault. But the reason that staff are supposed to be merit staff is that, in order to perform such an important, complex, and stressful job, qualified workers need extensive training and support.
Fraud Spiked During the Pandemic
Prior to the pandemic, fraud was a small fraction of improper payments. The criminals that found their way into UI applications starting in May 2020 did not, by and large, hack UI systems, but rather took advantage of the pandemic chaos to try various means to impersonate legal claimants. As it turns out, UI fraud is a whole-of-society problem for which there must be a whole-of-government partnership with private industry to solve. The good news is that this is happening. There are regular government wide collaboration efforts on this. Positive collaboration will be necessary to stop the criminals stealing a sorely needed benefit from workers.
During the pandemic, the massive differences between state systems was a boon to fraudsters, who would apply again and again for benefits—usually failing, but sometimes succeeding—and then simply move their operations to another state as soon as the first figured out how to block them. The solutions to fraudulent applications, however, were less portable because every system is so incredibly different. So the fraudsters had fifty-three chances to employ various tactics before they would have to evolve. Because states immediately started cooperating, with the help of the National Association of State Workforce Agencies (NASWA) and informal collaborations, state tactics to combat fraud evolved more quickly than if they had continued operating in isolation. Prior to the pandemic, not all states engaged with NASWA’s Integrity Center, but now all of them engage with at least some of its functions. Prior to the pandemic, ID verification was not a typical function of UI systems, because states would check with a person’s former employer to find out why a person became unemployed. However, because PUA covered self-employed workers and others without an employer to cross-check, fraudsters took advantage of that fact early in the pandemic. The person who just laid a worker off has to confirm that person should get a benefit, in an experience-rated system where successful UI applications raise employer taxes. However, on December 27, 2020 the Continued Assistance Act was signed into law adding verification of employment requirements and ID verification.
Another boon to fraudsters was the fact that these underfunded systems had to deal with this influx of claims while setting up new programs, so by the time a state was making a first payment, it was often worth many months of benefits all paid out in a lump sum. Ordinarily, claimants can expect to receive a first payment within two or three weeks, so if the state accidentally makes an initial payment to an individual later determined to be a fraudster, it would only have made a couple of weeks of payment. So part of the reason there are such large numbers involved is that a single mistake could mean months of benefits paid rather than weeks.
What Is Unemployment Fraud?
It is easy to confuse all of the numbers around improper UI payment and fraud. The improper payment rate in UI has historically been relatively high, hovering around 10–13 percent of benefits paid in the decade before the pandemic. Improper payment is mostly non-fraud and includes underpayments as well as non-fraud overpayments. Fraud, while defined slightly differently between states, generally involves an individual or entity knowingly providing misinformation to obtain a benefit. That could mean a worker lying about the reason they lost work or falsifying income in order to receive a higher benefit, or even organized crime impersonating people to get a benefit. In the pandemic, that is what fraud looked like.
Fraud is complicated and evolving. While at the start of the pandemic, it involved criminal rings using identities stolen in major private sector data breaches such as the Equifax data breach to apply for benefits in PUA before ID verification and proof of income checks were put into place, interventions needed to continually evolve in response to new fraud techniques. One key security feature in the regular UI program, and the reason ID verification was never necessary before the pandemic, is that agencies check with the employer that just laid a worker off to make sure that their stories match and that a person separated for qualifying reasons. So, fraudsters started setting up false employers to avoid that check. When systems got sophisticated enough to detect false employers, the fraudsters started stealing checks from actual unemployed people by sending texts to them that said that there was an issue with their benefits and they needed to provide all of their information, and then sending them to a fraudster portal. Then, the fraudster would use the captured information to log in to the claimant’s actual UI account and change the bank account information. That is why the Department of Labor and NASWA partnered with the financial services industry to give states a way to see if the new bank account actually belongs to the claimant when a bank account is changed.
The bottom line here is that fraud is complicated. A single solution is never going to be enough. The UI program needs more and better resources to build sophisticated, secure systems. It also needs all hands on deck to understand this nuance. No one will be able to prevent fraud in this key economic stabilizer if the first instinct is partisan finger pointing.
What Comprises the Improper Payment Rate?
Improper payments are mostly mistakes. The top two reasons that people usually are paid improperly is because workers accidentally misreport income, or make mistakes in their work search activity or reporting. A huge contributor to the first factor is that workers often confuse earning money and getting paid. They do not report the correct date when they start working again, because they have paid yet. One remedy for this would be to change the UI program so that people can continue receiving benefits during their first week or two of work. That typically is a difficult time for workers—returning to work after an unemployment spell can be costly, with new transportation costs, clothing and uniforms, obtaining child care, and other transition costs. Also, since it may be a long time before a worker entering a new job is paid, typically up to three weeks, such a delay in a paycheck could interfere with paying rent on time, or other payments, as 64 percent of families that live paycheck to paycheck. Allowing a worker to collect benefits as they transition to their new job would make things better for workers and avoid confusion in unemployment insurance.
Work search errors are the result of a confluence of issues. State work search requirements vary widely. Some requirements are qualitative, others are quantitative. Some states require claimants to list work searches on continued claims forms, and some merely require that a claimant keep a log on their own. That means that when their claim is reviewed, they might not have good information about past work search. At the start of the pandemic, Congress rightly passed legislation encouraging states to suspend work search requirements during the workplace shutdown. So when states restarted the requirements after the shutdown, claimants had legitimate confusion about what their responsibilities were. A good solution to this would be to standardize work search requirements across states, modernizing work search requirements to make sure they encompass the way modern claimants look for work, clarifying expectations, and creating a simpler reporting system to make sure that claimants are meeting expectations.
Another reason for improper UI payments is systemic errors. The pandemic added all new layers of complexity to UI administration, and that led to mistakes. The new PUA program got up and running quickly, to states’ enormous credit. In so doing, however, questions arose that states tried to answer for themselves. Furthermore, over the course of the pandemic, the law governing PUA changed twice, which may have contributed to some confusion. In December 2020, it changed dramatically by adding new ID verification requirements, proof of employment requirements, and gave states the ability to waive some overpayments if the claimant was not at fault. As new questions came up, the Department of Labor issued “changes” or updates to its PUA guidance several times. When the Biden administration took office, it also added qualifying factors to PUA so workers could refuse unsafe work and some workers left out of the program could be included.
Some of the systemic errors during the pandemic were understandable. For example, early in the pandemic, some states asked claimants if they had one of the COVID-related qualifying reasons to collect UI, but did not ask that question every week. They found out later in the year that they were supposed to ask that question every week, and so they had to go back to claimants—many of whom had already stopped getting benefits—for their weekly COVID-related reason. If they did not get a response, that would be considered an improper payment. Some states made a mistake and paid the minimum DUA amount instead of the minimum PUA amount, which could be a few dollars per week difference, but is nevertheless an improper payment. Similarly, some states established a weekly benefit amount based on gross rather than net income, or put claimants into PUA instead of UI because the agency did not have a wage record and the minimum PUA amount was a few dollars more than they would be eligible for in UI. Again, these circumstances could amount to a few dollars per week due to innocent mistakes, but count as an improper payment.
Ensuring Balance and Equity
Fraud prevention should not be at odds with equitable access to benefits. Whatever fraud solutions are employed need to be evaluated to ensure that they are not blocking access to innocent claimants who lost work through no fault of their own. States and vendors need to make a more concerted effort to be sure that their solutions are not disproportionately blocking access for people of color or sweeping up innocent workers as suspicious through algorithms that pull data that could be biased. Due in part to an imbalance in fraud focus, erroneous denials doubled in the ten years just prior to the pandemic. In addition, workers of color have historically been more likely to be flagged for fraud. For example in Wisconsin, prior to the pandemic, more than 70 percent of claimants facing charges of fraud were Black, when the Black population in the state is one-tenth that, or about 7 percent. Better fraud detection should mean a closer review of flags. A strike team in another state found that the fraud flags that were in place before the review were only catching people making innocent mistakes, and not the criminal enterprises attacking the system, so the state improved its flagging system and prevented more fraud going forward.
The General Accountability Office recently issued a helpful report that goes into great detail analyzing various estimates of funds that were paid to fraudsters during the pandemic. The report lays out the pros and cons of using each methodology for estimating fraud. The reason we do not have absolute numbers is a confluence of factors. The biggest is that states are still digging out from the unprecedented workload laid out above. Combine that with due process rights, and the fact that appeals systems are also underwater, and it is clear how the same pressures that made it hard for systems to pay benefits early on continue to plague other efforts to get the right benefits to the right people at the right time.
The amount of fraud and other overpayments that have been recovered is a reliable and valuable number. The government has recovered nearly $1.4 billion in PUA overpayments both in fraud and non-fraud overpayments. On top of that, government recovery efforts have recovered over $980 million in fraud and more than $3.4 billion in non-fraud overpayments.
Another useful number is to consider how much fraud has been prevented. The Connecticut Department of Labor claims they have prevented $3 billion in fraudulent payments. Vendors report some numbers—for example identity vendor ID.me estimates that their identity solution has prevented $240 billion in fraudulent payments. However, these numbers are also, at best, guesses. The use of these products, login.gov, the NASWA’s IDH, various cross-matching services, interagency collaboration, state built solutions, and other interventions have also deterred fraudsters from targeting particular states, and the number of fraudsters discouraged from attempting to apply is difficult to measure.
Just as the numbers are more complicated that they seem, so too are the solutions. Successful fraudsters are sophisticated criminals with a multitude of evolving tactics. If anyone says they have a single simple solution to fraud, they are either misinformed or not being truthful. The solutions need to be multi-pronged, agile, and improve over time. States need to band together and learn from one another. NASWA’s efforts on this front have, especially when the fraud first emerged in 2020 helped states to learn from each other in new ways.
The first and most important step is appropriate administrative funding. The good news is that President Biden requested appropriate increases in administrative funding. While not fully meeting those requests, Congress has improved its allocation to UI administration for the past two years which is a beginning step in the right direction. Aside from absolute sums, we need to do more to recognize the cost of technology. Right now, states do not have the right funding to be able to set aside what is needed for the kinds of continual technological improvements that really should be made every year. Without the means to keep updating systems, states are left to compete to procure services from a limited number of vendors when there is an economic emergency. This is not an ideal situation to maintain system integrity. For example, ID verification is a new cost for states since the start of the pandemic, but Congress did not fully fund the administration’s request to pay for subscriptions to these services.
A full list of actions the Department of Labor has taken is attached. The steps include dramatic interagency collaboration. The commitment to stop fraud extends to the highest levels of government. That is why many of the items on the list speak to interagency working groups, information sharing, and partnership with NASWA on integrity efforts. At the start of the pandemic, a number of states did not participate with the Identity Center, but now all of them have at least some involvement. The Department of Labor worked with NASWA to add key functions to address evolving threats such as Bank Account Validation (BAV), a prisoner database crossmatch, and the Behavioral Insights toolkit.
A huge component of the work is centrally provided technical assistance. Fifty-three states and territories need to be able to learn from each other. One of the key elements of this effort has been to establish a Central Response Division within the Office of Unemployment Insurance and deploy “Tiger Teams” to states to dig deeply into their systems. These teams dig deeply into state systems and provide customized recommendations to make sure that they are employing all of the most sophisticated and comprehensive solutions to fight fraud, promote equity, and speed timely decisions. A summary of the kinds of fraud solutions that they have recommended is available on the Employment and Training Administration’s website. The Department of Labor allocated $200 million to states to implement these recommendations, and thirty states have already engaged with these teams. Another major intervention is simply providing states with direct funding to implement fraud solutions. Across the past administration and the current one, the department allocated $440 million to states for these purposes.
Ultimately, efforts must overlap. Fighting fraud cannot happen in a vacuum. If states are not able to process regular benefits efficiently, that creates opportunities for fraudsters. Without equity measures that ensure that all claimants understand the system and can apply for benefits without making mistakes, systems will have to spend time clearing innocent people making honest errors rather than pursuing actual wrongdoers. Stable systems that pay reliable benefits and that can withstand major potential stresses will require an all-hands-on-deck approach, which requires bipartisan cooperation and strong state/federal partnerships.