Fixing Massachusetts' Unemployment Insurance System

Amid the economic fallout from Covid-19, unemployment insurance (UI) has proved a vital part of Massachusetts’ social safety net. Not only have unemployment benefits aided laid-off workers, but when recipients spent those benefits at area businesses it helped stabilize the state economy and bolster state tax revenues.

At the same time, the pandemic has exposed serious shortcomings in Massachusetts’ unemployment insurance system. Having failed to set aside sufficient money to cover benefits, the state has been forced to take large loans from the federal government — loans that will ultimately have to be repaid by Massachusetts businesses. And even if we can ease repayment, as the governor has proposed, more fundamental fixes may be needed to avoid future borrowing and ensure our unemployment insurance program is ready for the next inevitable downturn.

Looking at the urgent needs of the moment as well as long-term challenges, we find that:

• Without legislative action, UI tax rates on employers are set to increase substantially this year. Now may not be the optimal time to raise rates, given the ongoing struggles of many Massachusetts businesses. Instead, a temporary tax freeze may be necessary.
• Repeatedly freezing unemployment insurance taxes — as Massachusetts has done for much of the last decade — is a recipe for long-term insolvency and future debt. To avoid this, a short-term freeze could be paired with longer-term changes aimed at building up reserves during good economic times, such as automatic UI tax increases when unemployment is low.
• Massachusetts’ unemployment insurance system virtually guarantees funding shortfalls. While benefits are designed to keep up with wages, taxes are not, so over time the needs of the system steadily outstrip contributions. A simple fix would be to index the taxable wage base so that UI taxes automatically track overall wage growth; this change would also limit the extent to which small, low-wage businesses subsidize large ones.
• Adding a tax on employees — as is done for Social Security and Medicare — could generate much-needed funding and also improve the political dynamics of unemployment insurance, giving workers a stronger sense of their dual role as beneficiaries and contributors.
• Massachusetts does offer some UI benefits that seem out of line with the rest of the nation. For instance, we are the only state that provides support for more than 26 weeks, and our system is open to workers with relatively little recent work history. Despite these controversial provisions, typical benefits in Massachusetts follow the broad rule of thumb that unemployment insurance should replace about half of lost wages.
• Businesses with a history of layoffs pay higher UI tax rates. However, the maximum tax rates may still be too low to ensure that all businesses are really paying their fair share.