Unemployment Cheats Raked in $16.5 Billion Last Year
Life + Money

Unemployment Cheats Raked in $16.5 Billion Last Year

The Fiscal Times/iStockphoto

You'd think the debt crisis would result in crack downs on government waste and fraud. But as jobless claims increase in this jobless recovery, abuses in unemployment insurance have hit record levels.   States paid out a whopping $16.5 billion to ineligible individuals last year.  During the 12 months from April 2010 to March 2011, overpayments jumped again to 11.6 percent--more than $1 for every $9 paid out, a 1.6 percent increase over the historical average last decade.

The Labor Department estimates 2010’s biggest overpayment benefactors—or about 30 percent-- were people who have begun working in new jobs, but continue to cash their unemployment checks, and another 30 percent were people not properly or actively searching for work.  About 20 percent of the money went to workers who claimed benefits after being fired for cause or quitting their jobs voluntarily—conditions which technically exclude people from collecting.  But only 2.4 percent of the 10.6 percent in overpayments were classified as intentional fraud in 2010, the Labor Department said. 

Whether it's intentional fraud, or omitting or misstating information on an electronic claims form is a dubious distinction.   Labor Department officials told The Fiscal Times that the overpayment explosion is more a natural consequence of rising unemployment insurance rolls inundating overwhelmed state systems—not rising fraud.

With the unemployment rate stuck at 9.1 percent, experts predict improper payment levels could rise further if the recovery continues to stall. “It’s not that the system got worse during the downturn or that there was so much more fraud,” said James Sherk, a senior policy analyst in labor economics at the Heritage Foundation, a conservative think tank.  “It’s that the program expanded so greatly, didn’t have the proper enforcement controls in place before, and it still doesn’t, so you’ve got a proportionally higher level of incorrect payments.”

Excuses, Excuses
“We don’t think this is mostly about fraud—we think it’s a lack of clarity of understanding what eligibility is,” said Jane Oates Assistant Secretary for the Employment and Training Administration at the Department of Labor—the agency charged with providing states administrative funding for unemployment insurance. “Many people feel that they’re allowed to collect unemployment benefits until they get their first paycheck of a new job, when the correct definition is you are no longer eligible to collect the first day you start working.”

States used the 2009 stimulus
funds to hire new unemployment
insurance staffers but they
didn’t teach them about integrity.

“This is about states not having enough resources to enforce eligibility,” said Walter Nicholson, an economist at Amherst College who specializes in unemployment insurance.  “It’s kind of like people who make honest mistakes on their income taxes, but if the employer doesn’t speak up, and the state keeps paying, how are they to know they’re wrong?”

The Labor Department agreed that enforcement has grown more lax.  Some money is slipping through the cracks because states’ unemployment agencies are hyper-focused on getting unemployment checks to claimants quickly, Oates told The Fiscal Times.  States used the 2009 stimulus funds to hire new unemployment insurance staffers, “But they didn’t necessarily teach them about integrity,“  Oates said.  “Their first priority in 2010 was to get money out the door… integrity efforts became a distant second.”

Some of the targets are
Louisiana and Indiana,
where nearly 43 percent
of all payments were erroneous.

To combat the trend, the Labor Department is launching a yearly review program this month to evaluate which states need the most federal help cracking down on overpayments.  Some of the targets are Louisiana and Indiana, where nearly 43 percent of all payments were erroneous in 2010. The Labor Department also announced $192 million in federal grants to 40 states last week to help them improve their technology systems for dispensing checks and intercepting unemployment insurance fraud.  “But I think it’s all kind of half-hearted at the moment,” Nicholson said.  “Just getting the checks written and out to people is proving to be a real tax on their system, so I’d be surprised if they push hard on states to recover overpayments.” Of the $16.5 billion in overpayments in 2010, only $474 million was recovered.

“It’s much easier to file
things in a fraudulent way
because the gatekeeper is
even more compromised online.”

The funding structure of the unemployment insurance system may also be leading to some payment carelessness, Nicholson said.  States administer all of the unemployment compensation, using employer unemployment insurance taxes to fund it for the first 26 weeks someone is unemployed.  But after that point, the federal government reimburses states to pay out extended benefits—which now last as long as 99 weeks in most states.  The state has a direct interest in enforcing its rules for the first six months, but less incentive to do so for extended benefits because they’re just spending federal money, Nicholson said.  “Employers have no real incentive to keep after states to enforce rules after that six month period, and states have less to be concerned about, because it’s all federal money.”

But weak state agency enforcement isn’t the only reason improper payments are abounding.  Lying to the government is much easier when a person’s only contact with the state agency is online or on the telephone, Cushing said.  “It’s much easier to file things in a fraudulent way because the gatekeeper is even more compromised online.”  More than 98 percent of unemployment insurance claims and updates are made online and on the telephone, the Labor Department said. 

A big chunk of the faulty payments may occur because of the lag time between when a claimant files for unemployment, and when an employer contests it.  State unemployment agencies assume what a claimant says is true unless an employer objects, said James Cushing, a Pennsylvania attorney specializing in unemployment compensation.  “It’s not unusual for two or three months to go by where a claimant receives payments for benefits, and then at a referee’s hearing it gets determined that they were never eligible to begin with,” Cushing said.   Then a secondary hearing is held later to determine if the claimant intentionally concealed information or lied, and if so the state can sue the person for the money owed.