You are using an outdated browser.
Please upgrade your browser
and improve your visit to our site.
Skip Navigation

Obama's Budget Proposes a Major Overhaul of Unemployment Insurance

Getty Images

Over the past few years, Democrats and Republicans have fought vigorously over extending long-term unemployment benefits, which expired at the end of 2013. The issue dropped from headlines last spring, after House Republicans successfully killed a bipartisan deal in the Senate to renew them for another five months. But President Barack Obama is about to put them back in the news: In his budget for the 2016 fiscal year, the president will propose a major overhaul of the unemployment insurance (UI) system, a move designed to make UI both more efficient and more effective.

The current UI system is a partnership between states and the federal government. Almost every state in the United States (with a few exceptions) offers unemployed Americans 26 weeks of benefits that replace approximately 50 percent of their previous wages. States are typically responsible for funding those benefits, and the federal government generally pays the administrative costs. For states with rapidly rising unemployment rates, the Extended Benefits (EB) program provides an additional 13 or 20 weeks of benefits for unemployed workers. Historically, the costs of the EB program were split between the states and federal government. However, from 2009 through 2013, the federal government picked up the full cost of the benefits. (That also expired at the end of 2013.)

The EB program is clunky. It only “triggers on” for states when the insured unemployment rate—the number of UI recipients out of the total possible number of people who could collect UI—reaches at least 5 percent and is 20 percent higher than during the same period in the past two years. “The triggers are broken so that they never turn on when the economy actually needs them and states are reluctant to fix it because it’s not federal financing,” a senior administration official said.

In addition, Congress passed a program called Emergency Unemployment Compensation (EUC) in 2009 to provide up to 53 additional weeks of benefits. Historically, policymakers have enacted EUC programs whenever recessions hit. But since Congress actually has to take a proactive step in passing the legislation, those programs often start too late, after a recession has already hit, and end too early, as happened after this past recession.

The White House wants to fix those problems by permanently reforming and modernizing the EB program. The proposal eliminates the current triggers in the EB program and creates new ones at state unemployment rates of 6.5 percent, 7.5 percent, 8.5 percent and 9.5 percent. When a state’s unemployment hits any of those four levels, it triggers an additional 13 weeks of unemployment insurance available to the state’s unemployed workers. The four tiers can add a maximum of 52 weeks of benefits. In addition, if a state’s unemployment rate rises rapidly, the proposal would also trigger additional benefits. “Take the 6.5 percent [trigger] as an example. That would trigger [benefits] on if either the state’s unemployment is over 6.5 percent or the sum of the state’s unemployment rate and the change in the state’s unemployment rate over the past year is 6.5 percent,” the official explained. “So if the state had an unemployment rate of 5.5 percent but its unemployment rate had increased by a full point over a year—which would be a leading indicator of a recession—the extended benefits would turn on.” These changes would allow the UI system to react faster to poor economic conditions, getting relief quicker to affected workers and providing a minor stimulus to the economy. The administration projects that the plan will cost $50 billion over the next 10 years, given a range of economic conditions.

The White House is also proposing to create a $5 billion pot of money to incentivize states to reform their UI programs. This part of the proposal is modeled after a similar UI modernization plan that was part of the stimulus. The plan has two components. One would offer states financial rewards for changing the eligibility criteria so that more people who work part-time or who work on and off are eligible for benefits. The second part would encourage states to implement programs to promote reemployment. This is an area where the plan could receive bipartisan support. For instance, the White House suggests that states could offer the unemployed relocation vouchers to move where jobs are more widely available, an idea that Republican Senator John Thune proposed in 2014. States could also support more extensive reemployment services and job training programs.

Obama will fund this overhaul of the UI plan through the reimplementation of a 0.2 percent surtax on employers, which was in effect for 35 years but expired in 2011 after Republicans refused to renew it. That raises $16 billion over the next 10 years. However, the surtax was originally supposed to be a temporary means for the federal government to pay for extended benefits, so Republicans will almost certainly reject that funding source.

The White House wants to raise the remainder of the revenue by increasing the taxable wage level for UI benefits. Currently, the government imposes a 0.6 percent tax on the first $7,000 in earnings of each employee, $42 in total. It’s a regressive tax since it is not imposed on income above $7,000. That means a person making $7,000 and a person making $700,000 pay the same $42. Obama proposes raising that $7,000 threshold to $40,000 and indexing it to inflation. However, the administration will also adjust the actual tax rate so that the changes are revenue neutral in the first year. Over the long-term, the plan raises revenue because indexing it would index the taxable wage level to inflation, unlike the current system. The White House also projects the plan to save additional money as states use the higher wage threshold to shore up their own reserves, requiring less support from the federal government.

This comprehensive proposal is another indicator that Obama has moved past the crisis part of his presidency. He can now propose policies that reform and modernize different aspects of the government, in this case unemployment insurance. “We’re post-recession and post-expiration of EUC,” the senior administration official said, “[We can] really think what this program should look like going forward and lay down a marker for that.”

Laying down a marker, of course, is very different from actually reforming the UI system. But with Republicans in control of Congress, it’s the best Obama can do. Now it’s up to Republican leaders to respond to the president’s plan.