Is the UI System Ready for a Recession?

Whenever there is a weak jobs report, pundits and politicians often question whether the US is on the verge of, or even in, a recession. The response to the US jobs report for February is just one example. That report indicated nonfarm payroll employment declined by 92,000 jobs, causing Senate Minority Leader Chuck Schumer (D-NY) to suggest the US economy was “teetering on the edge of recession.” The subsequent stronger-than-expected jobs report for March calmed some fears, which nonetheless remain elevated due to the war with Iran and resulting oil price surge. We’ll see what the April jobs report brings when it is released on May 8 . The next question often asked is whether the nation’s unemployment insurance (UI) system is prepared for rising benefit claims that inevitably accompany recessions. At its most elemental, that question involves whether state trust funds that support UI benefit payments are full enough to handle elevated claims typical of prior recessions. I last reviewed that question in March 2020 as concerns were mounting about potential business shutdowns and layoffs due to COVID-19. State trust funds then totaled almost $76 billion , and the most recent Department of Labor “solvency report” indicated that most states (31 of the 53 states and territories, counting DC, Puerto Rico, and the US Virgin Islands, that make up the UI system) seemed well prepared for a recession. The pandemic recession turned out to be historically brief, lasting just two months in early 2020. But its effect on UI trust funds was severe, with widespread shutdowns creating massive demand for UI checks. Unprecedented $600-per-week (and later $300-per-week) federal supplements stoked that demand by making unemployment more lucrative than work for most recipients. The promise of federal extended benefits to follow also encouraged millions to collect the maximum duration of state checks. Alongside a staggering $700 billion in federal benefits, states paid out a record $143 billion in UI checks in calendar year (CY) 2020 plus $44 billion in CY 2021. That compares with just $27 billion in state UI benefits paid in CY 2019, the year before the pandemic struck. One result was that 33 states drained their trust funds and had to borrow federal funds to continue paying promised benefits. Nearly all states have since repaid those loans, often with the help of flexible federal stimulus funds . As of April 23, just four states (California, Connecticut, Texas, and the US Virgin Islands, which reported in March it had fully paid off its loan) showed a federal loan balance. California’s balance, at nearly $21 billion, is by far the largest. Collectively, states at the end of CY 2025 had $75 billion in their trust funds, not counting the $21-plus billion in debt California and other states still owe on federal loans. But even though that balance nearly matches the $76 billion states had headed into the pandemic, today only 18 states—not 31 as before the pandemic—are counted as prepared for the next recession. One reason why is because the bar for what “prepared” means has been raised. That measure (officially called the “average high-cost multiple” or AHCM) considers whether a state’s trust fund could cover benefit payouts during an average of the three most expensive years in the past two decades. Adding the massively expensive 2020 payments to that calculation raises how much a state needs to have saved to be counted as “prepared,” resulting in more states missing the mark. National AHCM data is available through the end of CY 2024, when that figure stood at 0.29 , based on a national trust fund balance of almost $71 billion . That’s less than half the 0.80 figure for the end of CY 2019. That suggests that the official answer to whether the UI system is prepared for the next recession appears less optimistic than it was headed into the pandemic. But that answer is driven in part by historically large pandemic benefit spending, which hopefully will never be repeated. The answer is also subject to uncertainty over what federal benefits might be paid in response to the next recession. During the pandemic, the federal response featured unprecedented $600-per-week supplements to all UI checks along with a first-time program called Pandemic Unemployment Assistance (PUA). PUA aided the self-employed and gig workers among others who are not covered by and don’t pay taxes into the UI system. Those and other features made PUA extraordinarily vulnerable to massive improper payments and fraud . Hopefully, those abuses will never be repeated, either. The post Is the UI System Ready for a Recession? appeared first on American Enterprise Institute - AEI .