Research & Commentary: Unemployment Insurance Fraud and Overpayments

Published August 6, 2012

With the nation’s economy still in the doldrums, unemployment compensation funds in many states have become insolvent. One reason is that waste and fraud plague the system. In some states nearly 20 percent of all benefit payments result from error or fraud, according to the National Center for Policy Analysis. A July 2012 report from the U.S. Labor Department found the federal government and states overpaid an estimated $14 billion in benefits in fiscal year 2011, roughly 11 percent of all the unemployment insurance benefits paid out. 

These overpayments, coupled with the nearly depleted unemployment insurance funds in many states, suggest serious mismanagement. According to the Labor Department, overpayments are sent primarily to three kinds of people: people who are not actively searching for a job, former workers who were fired for cause or quit voluntarily, and claimants who continue to file after returning to work. 

Fixing this problem will require a national commitment because much waste is caused by poor communication between employers and state agencies and between states. Efforts to combat overpayments have been launched by the federal government and several states and have met with some initial success. 

A national directory of new hires that allows states to identify workers receiving benefits even after starting a new job was created to track those with new jobs. All states will be required to use this system by the end of 2012. The Labor Department is also encouraging states to use a new computer system that makes it easier for employers to report to state unemployment agencies why workers left their jobs. USA Today reports few states use the system, but the Labor Department is sending funds to state agencies to encourage its use. 

Finally, the federal and state governments have begun to enact new rules and policies giving them greater means to recover overpayments. Recently established rules allow states to tap U.S. income tax refunds to recover improper unemployment benefit payments. The Labor Department is calling for legislation that would require states to impose on the worker a penalty of at least 15 percent of excess payments. 

Overpayments affect everyone by putting the unemployment insurance system in jeopardy and by forcing current employees to pay higher unemployment taxes on their paychecks. Before considering tax increases, program extensions, or bailouts, each state should conduct a full review of its system to identify any overpayment problems. 

The following articles examine unemployment insurance overpayments, waste, and abuse from multiple perspectives.  

Overpaid Unemployment Benefits Top $14 Billion
Annalyn Censky of CNN Money discusses the recent report from the U.S. Department of Labor, which found the federal government and states overpaid an estimated $14 billion in benefits in fiscal 2011. Censky also examines how states are attempting to recover this money. 

Regulators Combat Unemployment Insurance Waste and Fraud
Paul Davidson of USA Today reports state and federal regulators are cracking down on waste and fraud in the unemployment insurance system as abuses have hit record levels and jobless claims surged in a weak economy. 

Wasting Billions on Unemployment Insurance Overpayments
Bill Conerly, a senior fellow with the National Center for Policy Analysis, contends the public accepts a high level of unemployment overpayments as a routine cost of doing business, instead of treating it as waste and fraud that must be stopped. 

Failures of the Unemployment Insurance System
Chris Edwards and George Leef of the Cato Institute describe the origins and structure of the unemployment insurance system. They critique the justifications given for government-run UI and discuss the economic distortions the system creates. The UI system raises the cost of hiring, creates a disincentive to work, reduces the incentive to save, and subsidizes some businesses and workers at the expense of others, the authors note. 

Unemployment Insurance Taxes: Options for Program Design and Insolvent Trust Funds
Writing for the Tax Foundation, Joseph Henchman recommends several significant improvements states can make to the unemployment insurance taxation and benefits programs. States could offer more innovative and sustainable methods to find jobs for the short-term and long-term unemployed while preserving benefits to support them in the meantime. These options include eliminating the firewall between administrative costs and benefits, reducing cross-subsidies through greater use of experience ratings, relying more on face-to-face training and advising, adopting elements of state workers’ compensation programs, and experimenting with individual accounts to encourage saving. These changes can help programs concentrate on their goal of ensuring a viable safety net for transition periods between jobs. 

A Quantitative Analysis of Unemployment Insurance in a Model with Fraud and Moral Hazard
David L. Fuller of Concordia University analyzes the provision of unemployment insurance in an environment with unobservable job offers and unobservable employment status. Fuller finds actual occurrences of unemployment insurance fraud amount to 10 percent of total benefits paid and reduces national welfare by around 1 percent. He found the economy is better off relying on minimal welfare payments instead of the current U.S. system of unemployment benefits. 

Comparison of State Unemployment Insurance Laws 2011: Overpayments
The U.S. Department of Labor examines state law provisions for identifying, establishing, and collecting UI benefit overpayments. All states have laws addressing these matters, and they differ in the treatment of overpayments in which the claimant is not at fault and those in which the claimant has committed fraud or willful misrepresentation or concealed material facts. 

Oregon Unemployment Insurance Overpayments
Fraudulent unemployment insurance claims cost Oregon taxpayers $76.3 million in 2003, or 9.5 percent of all claims paid. Oregon’s fraudulent claims rate is higher than the national average, and the state spends significantly more on processing claims than most. This Cascade Policy Institute paper by William B. Conerly argues Oregonians should demand better accountability from their Employment Department before spending more on this flawed system. 

Increased Focus on Program Integrity Could Reduce Billions in Overpayments
The Government Accountability Office reports on the extent and type of overpayments in the unemployment insurance program, including those attributable to fraud or abuse, and it identifies factors that contribute to overpayments and actions taken by the Labor Department to increase program integrity. 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Finance and Insurance News Web site at, The Heartland Institute’s Web site at, and PolicyBot, Heartland’s free online research database, at