The Unemployment Insurance System Is Set to Get a Tech Makeover — but It Needs Much More, the Biden Administration Says

The technologists who once overhauled the federal government’s HealthCare.gov website after the disastrous rollout of Obamacare are now being deployed to help modernize and streamline the nation’s aging unemployment insurance system, which buckled under a pandemic-driven wave of legitimate and fraudulent claims.

The U.S. Digital Service, an arm of the White House that works across the federal government to tackle big technological challenges, has embarked on a reconstruction that will cover the entire UI system, from initial claim filing to benefit appeals, according to a memo and presentation obtained by ProPublica through a public records request. “We envision a future in which the federal government provides software that states may use to fully administer their UI program,” the agency said in the June memo to state UI systems.

The federal agency aims to deliver on that vision by creating shared software services that states can choose to plug into their UI operations to handle tasks such as claim intake, fraud prevention and identity-verification. If Congress boosts unemployment aid in the future, as it temporarily did during the pandemic, the software is intended to update to implement such changes instead of leaving it up to the states and territories to manually update their systems.

A spokesperson for the U.S. Digital Service confirmed the agency is working on the modernization effort with the Department of Labor and said the project may evolve based on feedback from states.

The technology overhaul is a central piece of a $2 billion plan, funded by the $1.9 trillion stimulus legislation signed into law by President Joe Biden in March, to strengthen the nation’s overburdened and fraud-plagued UI system as it emerges from the busiest period in its 86-year history. At stake is whether millions of Americans will again face delays, fraud and frustration the next time the economy is rocked and workers turn to jobless aid to help them get by.

But even the agency spearheading the effort says broader, fundamental changes are needed, which can only come from Congress. “To be completely honest, the administrative fixes that we are proposing here will certainly go a very long way to making things better, but it’s not going to be fixed unless there’s underlying UI reform,” said Michele Evermore, a deputy director of the newly established Office of Unemployment Insurance Modernization within the Labor Department. But, she added, “it’s not all that we need to fix UI, frankly.”

Nearly $800 billion of jobless benefits helped some 53 million workers weather the economic disruption that accompanied the COVID-19 pandemic, according to Department of Labor figures. That’s more than 25 times what the system pays out in a typical non-recession year. As ProPublica reported in July, cybercriminals siphoned off tens, if not hundreds, of billions of those aid dollars and made it more difficult for legitimate claimants to get paid.

A massive government effort, separate from the new UI technology plan, is underway to recover fraudulently obtained payments, including through the banking system. As part of that, the Department of Labor has asked states to aid law enforcement in recovering stolen funds through asset forfeiture, according to emails obtained through a public records request. A dozen federal agencies are involved in the initiative, according to the Secret Service, which has recovered about $1.1 billion through asset forfeitures in this fiscal year. That’s about 11 times the normal volume, according to figures provided by the agency.

The special pandemic unemployment benefits that powered the surge in aid, and attracted much of the fraud, expired on Labor Day. That ended assistance for more than 8 million Americans, according to estimates by the Century Foundation, a nonpartisan think tank that’s been tracking pandemic unemployment aid.

With the initial pandemic economic crisis receding, the government is now facing a recurring challenge: how to fix the system so that Americans will have an easier time getting jobless aid during the next downturn and fraud will be less rampant.

That question came up on Capitol Hill when Secretary of Labor Marty Walsh testified at a budget hearing this spring. A California lawmaker told Walsh that “it often feels like Groundhog Day” when the unemployment insurance system breaks down during a crisis: The failure is followed by plans to fix the system, which don’t come to fruition, after which the same problems recur during the next economic downturn.

Walsh said the administration would start by shoring up the system using the $2 billion allocated by Congress in the stimulus bill. Those plans include the U.S. Digital Service tech overhaul. (An August announcement included one sentence noting the agency’s involvement but had no further detail on its role.) The $2 billion will also be used to procure identity verification software to help states root out fake claims and prevent fraud. And funds will be allotted to improve claimant outreach and customer service, including by clearing backlogs of unpaid claims.

But the Labor Department can’t address broader problems without new legislation. Created in 1935, the UI system is a federal-state partnership in which the federal government issues guidelines for how states must design and run their unemployment insurance programs, while the states have latitude to determine who is eligible, how much aid they can collect and for how long.

The UI safety net has been shrinking for decades. In the late 1950s, around 1 in 2 jobless workers received unemployment benefits. That shrank to fewer than 1 in 3 before the pandemic, according to Labor Department data.

One reason the safety net is shrinking is that the system has not kept up with changes in the labor market. “The UI system was originally designed for a 1935 labor force,” said Stephen Wandner, a labor economist who studies unemployment insurance. “Over the last 80-odd years, the labor force completely changed. The federal rules didn’t change.”

Unemployment insurance was set up to serve full-time wage workers earning steady paychecks who suddenly get laid off through no fault of their own. That excludes the rising ranks of self-employed “gig economy” contractors who didn’t qualify for unemployment insurance until Congress created a new pandemic unemployment insurance program specifically designed for them (that program has now expired). Employees who work intermittently or part time or earn low wages also have trouble building up the history of wages they need to qualify for jobless aid, according to a recent report by several think tanks and pro-labor groups that detailed the system’s shortcomings. “Those gaps in work history and labor force attachment can really keep you from getting unemployment,” said Josh Bivens, director of research at the Washington-based Economic Policy Institute, which co-authored the report.

Meanwhile, states have been cutting benefits to shore up trust funds depleted by the surge in unemployment following the financial crisis. In 2007, all states provided a maximum of at least 26 weeks of unemployment benefits. By 2015, nine states had reduced the duration, to as low as 12 weeks in North Carolina, which has slowly transformed itself into the worst state to be unemployed. Other states have simply made it more difficult for claimants to get benefits. “The states basically do whatever they want,” Wandner said.

The result is a patchwork of inequality among states that worsens with each economic downturn, according to Evermore. “What tends to happen is we enter an economic crisis with an insufficient system and states spend all of their trust fund dollars. And then we emerge from the crisis, everybody’s tired of talking about unemployment insurance and then, over the course of the next decade, states winnow away benefits further,” said Evermore, who previously worked as a policy analyst at the pro-labor National Employment Law Project. “That is absolutely what I anticipate if there’s no unemployment insurance reform.”

Congressional reform efforts could run into opposition, particularly from Republican-led states that may not be inclined to increase taxes or sweeten benefits to comply with new federal rules. “It gets pretty dicey when the federal government starts telling Colorado or New Jersey how much they should or shouldn’t tax their employers,” said John Pallasch, an assistant secretary of labor during the Trump administration. “That’s a state decision, as far as I’m concerned, and they need to be allowed to make those decisions.”

A spokesperson for the White House said President Biden is committed to unemployment insurance reform, which he included in his proposed budget.

Sens. Ron Wyden, D-Ore., and Michael Bennet, D-Colo., have introduced legislation that would require state UI programs to meet minimum benefit standards and cover more workers. All states would have to offer at least 26 weeks of unemployment benefits and replace 75% or more of a worker’s wages, among other changes. A spokesperson for Wyden said he will seek to include as much of his bill as possible in the $3.5 trillion spending package that is now being negotiated by lawmakers. Inclusion in that package would give the proposals a higher likelihood of passage, though the prospects of the broader spending legislation remain highly uncertain given unified Republican opposition and fissures already appearing among Democrats.