Alaska’s unemployment numbers skyrocketed between 2020 and 2021 as a result of the COVID-19 pandemic and the government’s response to it. As a result of the extremely high unemployment, the state was required to pay out much more in unemployment insurance (UI) benefits than is typical. Additionally, the federal government implemented a $600 weekly bonus (and a $300 weekly bonus after the first bonus expired), which incentivized many unemployed individuals to stay on UI benefits rather than find work. This led to fraud, a dearth of workers for businesses to hire, and extended unemployment payments that depleted Alaska’s UI trust fund even further than was necessary. To replenish the state’s UI trust fund, get Alaskans back to work, and keep a similar situation from happening again, Alaska should index UI benefits to economic conditions.
Background
In 1935, the federal government passed the Social Security Act, requiring states to maintain UI trust funds. The funds are used to pay out temporary, limited benefits to unemployed individuals while they search for work. Because of federalism, states have the flexibility to administer their UI program in a way that works best for them.
Due to the high job loss in Alaska, the state had to pay out an extraordinary number of claims in 2020 and 2021. Thus, the UI trust fund is severely depleted compared to the months before the pandemic. As of December 31, 2021, Alaska’s UI trust fund balance is $390 million, compared to a balance of $493 million at the end of February 2020. At its lowest in 2021, the trust fund balance was only $267 million, almost half of what it was before the pandemic.
Alaska’s UI trust fund is financed mainly by payroll taxes on employers. Businesses pay the majority of the tax to fund UI benefits for unemployed workers. To replenish a depleted trust fund, states increase payroll taxes on businesses. Increased taxes are the last thing struggling Alaska employers need as they recover from two years of inconsistent business and a shortage of workers.
Solution: Indexing
Rather than raising payroll taxes on small businesses across the state, Alaska should implement a technique known as UI indexing. UI indexing would tie the state’s unemployment program to the state’s economic condition. When the unemployment rate is high – and job opportunities are presumably low, such as at the height of the pandemic – workers would receive UI benefits for a longer period of time, allowing them more time to search for work. When the unemployment rate is low – and jobs are plentiful – workers would be expected to return to work more quickly before becoming ineligible for UI program payments.
Indexing Alaska’s UI program to the state’s economic condition in this way would help individuals focus on reemployment, allow employers to fill job vacancies and thus continue to provide goods and services, halt the need to increase payroll taxes on employers, and allow the state to quickly rebuild its trust fund.
At least four states – Florida, Georgia, Alabama, and North Carolina – have already indexed their UI trust funds, and the results are telling. Before the pandemic, all indexed states performed better in terms of payroll tax rates, program duration, and the balance of their trust funds compared to the other states. More striking is their post-pandemic performance. All indexed states had replenished their trust funds before November 2021, while non-indexed states’ funds were a collective $14 billion in the red. Additionally, in Florida and North Carolina, workers were only enrolled in the UI program for an average of 9.8 weeks, compared to 15.6 weeks in the rest of the nation. Employers in states that index unemployment pay about $1.90 in UI taxes for every $1,000 in payroll. In Alaska, the rate for employers goes up to 2.4 percent.
Alaska needs employed workers, thriving businesses, and a stable UI trust fund. Employed workers and thriving businesses will help push the state’s economy forward and help Alaskans succeed. A stable UI trust fund is important so that in times of economic downturn (such as a national pandemic), the state can offer unemployed workers temporary assistance.
If the state were to index unemployment benefits to the unemployment rate, it could get individuals reemployed, replenish its UI trust fund, and decrease payroll taxes for employers. This is a smart move for Alaska and will benefit generations to come.