How Worker Benefits Turn into Welfare

The disparity between what the federal government collects in taxes and what it spends was never greater than during the pandemic, when annual deficits peaked at $3.1 trillion in 2020. Even today, when the president swears Bidenomics is “working everywhere,” annual deficits exceed $1.5 trillion, and are expected to only grow. One little-noticed driver of record deficits was the extraordinary federal unemployment benefits paid during the pandemic, whose costs were added to the deficit instead of being funded by state and federal payroll taxes. With temporary pandemic programs now expired, liberal policymakers propose reviving them—and transforming key parts of the nation’s unemployment benefits system into a de facto welfare program forever.

Since its creation during the Great Depression, the nation’s Unemployment Insurance (UI) system has been framed as “social insurance.” That is, it offers eligible workers “coverage” in the form of weekly benefit checks based on their pre-layoff earnings, fully supported by “premiums” in the form of state and federal payroll taxes paid by employers on behalf of eligible workers.

Yet the reality of the UI system strayed far from that rhetoric in recent years. Unemployment benefit expansions temporarily legislated during the pandemic were supported mostly by federal general revenues—meaning everything but payroll taxes. In fiscal years 2020 and 2021, federal general revenues supported a record 71 percent and 88 percent of unemployment expenses, respectively. Only 29 percent of benefit costs in 2020 and just 12 percent in 2021 were supported by payroll taxes.  

 In just 18 months, a record $700 billion was spent on federal pandemic unemployment benefits, with every dime of that staggering sum stemming from the same federal general revenues that typically support welfare benefits.

The details of pandemic programs reveal how key benefits were unrelated to workers’ prior earnings as well. For example, at the start of the pandemic Congress paid the same $600-per-week (and later $300-per-week) federal supplements called Pandemic Unemployment Compensation to all unemployment benefit recipients. Similarly, the temporary Pandemic Unemployment Assistance (PUA) program initially offered all claimants the same guaranteed minimum benefit in each state, again regardless of any individual’s prior earnings.

Supporters argue the uniform payments protected systems straining under record claims. They have a point that tailoring benefit levels to workers’ prior earnings, as UI has always done, is more challenging than offering the same flat payment to all. But that fails to explain why liberals are now proposing to revive flat benefit supplements and flat PUA-like benefits forever, supported by federal general revenues instead of payroll taxes.  

It wasn’t always this way. Since the 1950s, when Congress started legislating temporary federal benefit expansions in recessions, lawmakers also enacted temporary federal payroll tax hikes to cover the added costs in most years. The last vestige of Congress’ commitment to cover expanded benefit costs was a small federal “surtax” created in the 1970s, which expired in 2011. As the figure above displays, recent recessions have been accompanied by growing injections of federal general revenues into the UI system, contradicting its social insurance marketing. As the massive pandemic expansions displayed as never before, that also removed an important restraint on the scale of benefit increases—that the cost of those increases would be matched by unpopular payroll tax hikes on jobs. Once bottomless general revenues were tapped, the sky became the limit on benefit hikes.  

For their part, states also previously depended on increased payroll taxes to refill UI trust funds and repay federal loans. But that too changed during the pandemic, when states used an unprecedented $23 billion in stimulus funds—which also stemmed from federal general revenues—to shore up their trust funds and pay back federal loans. That keeps payroll taxes low, but it’s no less an injection of federal general revenues into this nominally payroll tax-funded system.  

While temporary pandemic programs have now expired, Congressional liberals have proposed permanently reviving those extraordinary benefits, and even adding welfare-like “dependent allowances,” all supported forever by open-ended federal general revenues. Those benefit expansions promise to not only add to already mounting federal deficits. They also conform with these policymakers’ broader agenda of separating government benefits from work and thereby subsidizing more nonwork. That’s the opposite of social insurance, and threatens to permanently convert large swaths of the UI system into yet another welfare program, whose benefits are unconnected with workers’ earnings and payroll taxes.

Congress should recognize the scope of this program’s recent radical turn, insist that UI remains a self-funded social insurance program in the future, and reject efforts to convert it into yet another welfare giveaway.

Matt Weidinger is a Rowe Fellow in poverty studies at the American Enterprise Institute.