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Long-Term Unemployment Benefits: The Costs
December 11, 2012
With the unemployment numbers released Friday showing relatively slow gains in hiring, the latest issue of contention over the Fiscal Cliff is whether or not to extend certain long-term unemployment benefits, including the Emergency Unemployment Compensation program and temporary provisions of the Extended Benefit program which are set to expire at the end of this month. These programs are separate from the basic unemployment insurance (UI) structure which will not be affected by the Fiscal Cliff. The Cato Institute explains it well:
“The extended benefits program provides 13 weeks of benefits in addition to the basic 26 weeks. However, in response to the recent recession, Congress increased the duration of extended benefits and passed various packages of additional increases, with the result that benefits could be drawn for nearly two years in many states.”
Democrats, lead by Senate Democratic Policy Committee chairman Charles Schumer, D-N.Y., are calling for an extension of these benefits, while Republicans are by and large concerned over the less palatable aspects of extending them long-term: billowing costs and a roughly 11% fraud rate in UI in general, and the documented disincentives to securing employment when benefits are stretched out indefinitely. Although some Republicans would be willing to extend the benefits, they are seeking spending cuts in other areas to offset the costs, something Democrats have shown little appetite for. Sen. Richard Blumenthal, D-Conn recently stated: “an offset, I think, is unnecessary and its bad economics.”
The costs of maintaining unemployment benefits are no small matter, having mounted to a colossal $520 billion since the economic meltdown in 2007, according to the Congressional Budget Office. This represents an increase of about two-thirds, from $33 billion in fiscal year 2007 to $94 billion in FY 2012. The Hill recently quoted a House GOP aid on the issue:
"After spending $215 billion and adding $180 billion to the debt, more spending on federal unemployment benefits, above and beyond what the states already spend, would have to be carefully considered during fiscal cliff talks.”
While the costs to maintain the entire program are certainly concerning from a fiscal perspective, existing fraud and overpayments within the system are yet another reason why fiscal conservatives are wary of extending benefits. In July of this year, CNNMoney reported some particularly worrying numbers:
“Overpayments are a rampant problem in the unemployment insurance system. The federal government and states overpaid an estimated $14 billion in benefits in fiscal 2011, or roughly 11% of all the jobless benefits paid out, according to reports from the U.S. Labor Department.”
Equally as troubling are the various studies which show extended unemployment benefits actually hinder reemployment, as they appear to provide less incentive for unemployed individuals to actively seek and secure work. In the Cato Institute’s detailed report on the negative economic effects of extended unemployment benefits, the authors cite economists Martin Feldstein and Daniel Altman noting:
"The most obvious and most thoroughly researched effect of the existing UI systems on unemployment is the increase in the duration of the unemployment spells. By reducing the cost of remaining unemployed, UI benefits induce individuals to have longer spells in order to search for a better job or simply to enjoy some leisure."
If our nation is going to begin reining in spending and situating itself on a path of fiscal sustainability, the long-term unemployment program is a great place to begin meaningful reforms. With the national debt blowing passed $16 trillion this year, it is vitally important that lawmakers at least consider the costs of continuing the extended-benefits program, put mechanisms in place to reduce fraud, and ensure that the benefits are a short term safety program to help individuals while they find work, not a substitute for work itself.
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