COVID-19

State Options to Expand Unemployment Benefits

The coronavirus disease 2019 (COVID-19) outbreak has pushed unemployment in California to record highs. With so many Californians out of work, the state may want to explore options to expand assistance to unemployed workers. There are two potential motivations for doing so.

Mitigate Personal Financial Hardships. Cash assistance to unemployed workers can help them continue to meet their financial obligations (like mortgage payments, rent, or car loan payments) and prevent further deterioration of their financial situation.

Provide Economic Stimulus. Compared to the federal government, the state has limited options to provide economic stimulus. To boost the economy, spending must create new economic activity. An increase in funding to one program can boost activity in one part of the economy. At the same time, because the state must enact a balanced budget, funding must be reduced to other programs or taxes must be increased. This reduces activity in other parts of the economy. The state nevertheless has two ways to increase spending without immediately increasing revenue or reducing expenditures: (1) borrow within existing programs and (2) use budgetary reserves. In the case of benefits for unemployed workers, the state has options to use both of these mechanisms to expand benefits without making offsetting expenditure reductions or revenue increases.

In this post, we discuss options for the state to increase unemployment insurance (UI) benefits or expand benefits to ineligible workers. We include a cost estimate for each option we discuss. These estimate reflect the best information available right now. However, conditions are changing rapidly. Our estimates are, therefore, subject to significant uncertainty.

Background

State’s Existing UI Benefits. Through the Employment Development Department (EDD), most employees are eligible to receive weekly UI benefits when they become unemployed through no fault of their own. The amount of UI benefits a worker receives depends on how much they earned before their unemployment. Benefits are available for up to 26 weeks. To fund the benefits, employers pay a payroll tax on the first $7,000 of employee wages. In 2019, the state collected $5.9 billion in UI taxes from employers and issued about $5.5 billion in total UI benefits. On average, in 2019, unemployed workers received about $330 per week for 17 weeks. During times of increased unemployment, state funds for unemployment benefits may run out. When this occurs, the state receives federal UI loans to continue paying out benefits. Once the economy recovers, the state and employers repay the federal UI loans.

Increased UI Benefits Under Federal COVID-19 Relief Package. On March 27, the federal government enacted H.R. 748—the Coronavirus Aid, Relief, and Economic Security Act. As we detailed in a recent post, Unemployment Insurance for Workers Impacted by COVID-19, the bill increases benefits by $600 per week for all UI recipients. The increased benefit is the same for all recipients and does not depend on a worker’s past earnings. These benefits are available until July 31, 2020. H.R. 748 also provides federal funding for a 13 week extension of UI benefits, from 26 weeks to 39 weeks. Finally, the bill expands eligibility for UI benefits to some self-employed workers who are unable to work due to COVID-19.

Options to Increase Unemployment Insurance Benefits

In an economic slowdown, UI benefit payments typically exceed UI tax collections. When this occurs, the federal government provides a loan to the state to allow it to continue paying benefits. This loan is repaid by employers and the state in the future, when the economy has recovered. This arrangement could allow the state to increase UI benefits right now without immediately needing to take offsetting fiscal actions. Below, we describe two ways to boost UI benefits.

Change Statutory Formulas to Increase State UI Benefit. Unemployed workers receive UI benefits based on their wages before they become unemployed. Workers with higher prior earnings receive a larger benefit, up to $450 per week. One option to increase state UI benefits is to change these formulas to increase weekly benefit amounts for some or all workers. For example, the state could provide all unemployed workers the maximum benefit of $450 per week. (The average benefit is about $340 per week.) Under this option, unemployed workers with lower wages would get a larger increase. Unemployed workers who receive the maximum benefit would see no change. We estimate that this option could cost about $1 billion per month. The main drawback of this approach is that it could be difficult to put in place quickly.

Add State Dollars on Top of Federal $600. Another option to increase UI benefits would be to establish a state add-on to the $600 across-the-board benefit provided under H.R. 748. According to the EDD, a flat add-on would be easier to implement than adjusting state benefit formulas, as outlined above. Under current law, unemployed workers will receive combined benefits between $640 and $1,050 per week, depending on prior wages. The state could increase all UI benefits by $100 per week, boosting benefits to between $740 and $1,150 per week. We estimate that this option would cost roughly $1 billion per month.

Options to Assist Workers Who Are Ineligible for Unemployment Insurance

Many workers are not eligible for UI benefits, despite the expanded UI eligibility included in H.R. 748. Some workers are circumstantially ineligible—for instance, a recent college graduate who is on the job market but has no earnings history or a newly self-employed worker who has not yet filed a self-employment tax return. Other workers are categorically ineligible—most notably, undocumented immigrant workers. Although we do not know how many workers are currently ineligible, undocumented workers likely represent the vast majority. (Immigration experts estimate that 1.75 million undocumented immigrants work in California. The number of other ineligible workers is likely much smaller, perhaps in the tens of thousands.) In response to the limited relief available to these workers, the state may wish to explore options to provide alternative benefits similar to those available under the UI program. Below, we describe two ways to expand relief measures to these workers.

Establish State-Funded UI Program for Currently Ineligible Workers. The first option to assist currently ineligible workers is to build a new state program to provide similar benefits. Unlike the options discussed above, both the benefits and administration of such a program would need to be funded from current state resources. Weekly benefit amounts could be set based on each worker’s most recent tax return or other proof of income. In many cases, however, ineligible workers have no way to show prior earnings. This likely is true for undocumented workers who work informally and do not file income tax returns using an Individual Tax Identification Number. In these cases, the state could provide a minimum benefit amount—for example, by matching the federal add-on under H.R. 748 of $600 per week. Workers who can demonstrate earnings could receive the minimum benefit and the benefit based on prior earnings. Costs for providing these benefits to ineligible workers are difficult to estimate and depend on the structure of the benefits. Our rough estimate, is that, if the minimum benefit were set at $600 per week, such a program could cost several hundred million dollars per month.

Key Considerations. This option closely mirrors state and federal relief measures available to other workers. However, the limitations of EDD’s technology systems likely would present significant implementation challenges—and related delays in benefit payments. Additionally, the state would need to use current state resources to cover the costs of these benefits. This is because federal law does not allow the state to use state UI funds to pay benefits to ineligible workers.

Temporarily Allow Ineligible Workers to Access State Disability Insurance. A second option is to expand eligibility for State Disability Insurance (SDI) to workers unemployed as a result of COVID-19 but ineligible for UI. Under SDI, workers may take up to 52 weeks leave while receiving weekly benefits of 60 percent to 70 percent of their normal wages, up to $1,300 per week. The program is funded by a 1 percent employee payroll tax and provides weekly benefits to workers who cannot work due to an injury, illness, or pregnancy. The state’s Paid Family Leave program is part of the SDI program. The state SDI Fund (the account to which employer taxes are paid and from which benefits are paid) currently has about $3 billion in reserves. (Recent expansions to the Paid Family Leave program will result in a modest draw down of this reserve balance in 2020.) The state could set benefit amounts based on earnings for workers who are able to document earnings. For all other workers, the state could set a minimum benefit amount. Workers who can demonstrate earnings would receive the minimum benefit and the benefit based on prior earnings. Similar to the option above, the cost of expanding SDI eligibility in this way is difficult to estimate. Our rough estimate is that if the minimum benefit were set at $600 per week, such an expansion of eligibility could cost several hundred million dollars per month.

Key Considerations. The relative simplicity of implementing disability benefits for these workers likely would make the administration of this option simpler than putting in place a new UI program. Additionally, the SDI Fund is not subject to the same federal restrictions as the UI program. As such, the state could fund expanded benefits out of the SDI fund and repay the fund at a later time. However, because the SDI fund is not part of a state-federal partnership like the UI program, the state will not be able to seek emergency federal loans for the SDI fund.