Personal Finance
Unemployment insurance program is unprepared for a recession: experts
Job seekers attends the JobNewsUSA.com South Florida Job Fair on June 26, 2024 in Sunrise, Florida.
Joe Raedle | Getty Images
Renewed fears of a U.S. recession have put a spotlight on unemployment.
However, the system that workers rely on to collect unemployment benefits is at risk of buckling — as it did during the Covid-19 pandemic — if there’s another economic downturn, experts say.
“It absolutely isn’t” ready for the next recession, said Michele Evermore, senior fellow at the Century Foundation, a progressive think tank, and former deputy director for policy in U.S. Labor Department’s Office of Unemployment Insurance Modernization.
“If anything, we’re kind of in worse shape right now,” she said.
Unemployment insurance provides temporary income support to laid-off workers, thereby helping prop up consumer spending and the broader U.S. economy during downturns.
The pandemic exposed “major cracks” in the system, including “massive technology failures” and an administrative structure “ill equipped” to pay benefits quickly and accurately, according to a recent report issued by the National Academy of Social Insurance.
There’s also wide variation among states — which administer the programs — relative to factors like benefit amount, duration and eligibility, according to the report, authored by more than two dozen unemployment insurance experts.
“The pandemic exposed longstanding challenges to the UI program,” Andrew Stettner, the deputy director for policy in the Labor Department’s Office of UI Modernization, said during a recent webinar about the NASI report.
The U.S. unemployment rate, at 4.3% in July, remains a far cry from its pandemic-era peak and is low by historical standards. But it has gradually drifted upward over the past year, fueling rumblings about a potential recession on horizon.
Policymakers should address the system’s shortcomings when times are good “so it can deliver when times are bad,” Stettner said.
Why the unemployment insurance program buckled
Joblessness ballooned in the pandemic’s early days.
The national unemployment rate neared 15% in April 2020, the highest since the Great Depression, which was the worst downturn in the history of the industrialized world.
Claims for unemployment benefits peaked at more than 6 million in early April 2020, up from roughly 200,000 a week before the pandemic.
States were ill-prepared to handle the deluge, experts said.
Meanwhile, state unemployment offices were tasked with implementing a variety of new federal programs enacted by the CARES Act to enhance the system. Those programs raised weekly benefits, extended their duration and offered aid to a larger pool of workers, like those in the gig economy, for example.
Later, states had to adopt stricter fraud-prevention measures when it became clear that criminals, attracted by richer benefits, were pilfering funds.
The result of all this: benefits were extremely delayed for thousands of people, putting severe financial stress on many households. Others found it nearly impossible to reach customer service agents for help.
Years later, states haven’t fully recovered.
For example, the Labor Department generally considers benefit payments to be timely if issued within 21 days of an unemployment application. This year, about 80% of payments have been timely, compared to roughly 90% in 2019, according to agency data.
It’s imperative to build a system you need “for the worst part of the business cycle,” Indivar Dutta-Gupta, a labor expert and fellow at the Roosevelt Institute, said during the recent webinar.
Potential areas to fix
Experts who drafted the National Academy of Social Insurance outlined many areas for policymakers to fix.
Administration and technology were among them. States entered the pandemic at a 50-year low in funding, leading to “cascading failures,” the report said.
Today’s system is largely financed by a federal tax on employers, equivalent to $42 a year per employee. The federal government might opt to raise that tax rate, for example, the report said.
Raising such funding could help states modernize outdated technology, by optimizing mobile access for workers and allowing them to access portals 24 hours a day, seven days a week, for example. It would also make it easier to pivot in times of crisis, experts said.
Financing is the “biggest pitfall” that has allowed state systems to “really deteriorate,” Dutta-Gupta said.
More from Personal Finance:
This labor data trend is a ‘warning sign’
A ‘soft landing’ is still on the table
Average consumer now carries $6,329 in credit card debt
Additionally, policymakers might consider more uniform rules around the duration and amount of benefits, and who can collect them, said Evermore, a NASI report author.
States use different formulas to determine factors like aid eligibility and weekly benefit payments.
The average American received $447 a week in benefits in the first quarter of 2024, replacing about 36% of their weekly wage, according to U.S. Labor Department data.
But benefits vary widely from state to state. Those differences are largely attributable to benefit formulas instead of wage disparities between states, experts said.
For example, the average Mississippi recipient got $221 a week in June 2024, while those in Washington state and Massachusetts received about $720 a week, Labor Department data show.
Further, 13 states currently provide less than a maximum 26 weeks — or, six months — of benefits, the report said. Many have called for a 26-week standard in all states.
Various proposals have also called for raising weekly benefit amounts, to the tune of perhaps 50% or 75% of lost weekly wages, for example, and giving some additional funds per dependent.
There are reasons for optimism, Evermore said.
U.S. Senate Finance Committee Chair Ron Wyden, D-Oregon, ranking committee member Sen. Mike Crapo, R-Idaho, and 10 co-sponsors proposed bipartisan legislation in July to reform aspects of the unemployment insurance program.
“I’m pretty encouraged right now” by the bipartisan will, Evermore said. “We need something, we need another grand bargain, before another downturn.”
Jamie Grill | Getty Images
As U.S. markets continue to suffer steep declines in the wake of the Trump administration’s new tariff policies, you may be wondering what the next best move is when it comes to your retirement portfolio and other investments.
Behavioral finance experts warn now is the worst time to make any drastic moves.
“It is dangerous for you — unless you can read what is going to happen next in the political world, in the economic world — to make a decision,” said Meir Statman, a professor of finance at Santa Clara University.
“It is more likely to be driven by emotion and, in this case, emotion that is going to act against you rather than for you,” said Statman, who is author of the book, “A Wealth of Well-Being: A Holistic Approach to Behavioral Finance.”
More from Personal Finance:
Tariffs are ‘lose-lose’ for U.S. jobs and industry
Why uncertainty makes the stock market go haywire
Americans are suffering from ‘sticker shock’ — how to adjust
That may sound easier said than done when headlines show stocks are sliding into bear market territory while J.P. Morgan is raising the chances of a recession this year to 60% from 40%.
“When the market drops, we have sort of a herd instinct,” said Bradley Klontz, a psychologist, certified financial planner and managing principal of YMW Advisors in Boulder, Colorado. Klontz is also a member of the CNBC FA Council.
That survival instinct to run towards safety and away from danger dates back to humans’ hunter gatherer days, Klontz said. Back then, following those cues was necessary for survival.
But when it comes to investing, those impulses can backfire, he said.
“It’s an internal panic, and we’re just sort of wired to sell at the absolute worst times,” Klontz said.
‘Never trust your instincts when it comes to investing’
When conditions are stressful, our frame of reference narrows to today, tomorrow and what’s going to happen, Klontz said.
It may be tempting to come up with a story for why taking action now makes sense, Klontz said.
“Never trust your instincts when it comes to investing,” said Klontz, particularly when you’re excited or scared.
Meanwhile, many investors are likely in a fight or flight response mode now, said Danielle Labotka, behavioral scientist at Morningstar.
“The problem with that, in acting right away, is that we’re going to be relying on what we call fast thinking,” Labotka said.
Instead, investors would be wise to slow down, she said.
Just as grief requires moving through emotional stages in order to eventually feel good, it’s impossible to jump to a good investing decision, Labotka said.
Good investment decisions take time, she said.
What should be guiding your decisions now
Many investors have experienced market drops before, whether it be during the Covid pandemic, the financial crisis of 2008 or the dot-com bust.
Even though we’ve experienced volatility before, it feels different every time, Labotka said.
That can make it difficult to heed to the advice to stay the course, she said.
Investors would be wise to ask themselves whether their reasons for investing and the goals they’re trying to achieve have changed, experts say.
“Even though the markets have changed, why you’re invested, your values and your goals probably haven’t,” Labotka said. “These are the things that should be guiding your investments.”
While there is the notion that life well-being is based on financial well-being, it helps to take a broader view, Statman said.
At any moment, no one has everything perfect when it comes to their finances, family and health. In life, as in an investment portfolio, all stocks don’t necessarily go up, and it’s helpful to learn to live with the good and the bad, he said.
“Things are never perfect for anyone,” Statman said.
Anchiy | E+ | Getty Images
As the stock market continues to fall, some investors are eager to “buy the dip,” or purchase assets at temporarily lower prices. Financial advisors, however, urge clients to stick with long-term investing plans amid the latest volatility.
U.S. stocks plunged on Thursday after President Donald Trump issued sweeping tariffs on more than 180 countries and territories. The sell-off continued Friday after China unveiled plans to impose a 34% retaliatory tariff on all goods imported from the U.S.
As of Friday afternoon, the Dow Jones Industrial Average was down more than 1,700 points following a 1,679.39 drop on Thursday. Meanwhile, the S&P 500 was off 4.8% after losing 4.84% the previous day. The tech-heavy Nasdaq Composite slid by 4.9% after plummeting 5.97% on Thursday.
More from Personal Finance:
‘You’re running out of time’ to claim an IRS stimulus check, tax expert says
Disability advocates sue Social Security and DOGE to stop service cuts
Jean Chatzky: Amid tariff turmoil, ‘you do not want to time the market’
If you’re looking for buying opportunities while assets are down, here are some things to consider, according to financial advisors.
Timing the market is ‘impossible’
When asset values fall, there’s often chatter in online communities like Reddit about whether to “buy the dip.” Typically, investors aim to buy at a discount and expect an eventual recovery, which could lead to future gains.
While buying cheaper investments isn’t a bad idea, the strategy can be tricky to execute since, of course, no one can predict stock market moves, experts say.
“We never recommend timing the market, mostly because it is impossible to do without simply getting lucky,” said certified financial planner Eric Roberge, CEO of Beyond Your Hammock in Boston.
Instead, you should “stick to a thoughtful, rules-based investment strategy designed to get you through to your long-term goals,” he said.
Keep a ‘disciplined approach’
When buying assets during a market downturn, you need a “disciplined approach,” according to CFP Jay Spector, co-chief executive officer of EverVest Financial in Scottsdale, Arizona.
For example, some investors linger in cash while waiting for rock-bottom prices. But no one can predict the bottom of the market, experts say.
Waiting on the sidelines can be costly because the best returns can follow the biggest dips, according to research from Bank of America.
Rather than trying to time the bottom, you should consider “dollar-cost averaging,” which systematically invests your money at set intervals, Spector said. The strategy can capture lower prices while reducing risk, he said.
Buffett denies social media rumors after Trump shares wild claim that investor backs president crashing market
Amid tariff sell-off, avoid ‘dangerous’ investment instincts, experts say
Stocks making the biggest moves midday: PLTR, CAT, AAPL JPM
New 2023 K-1 instructions stir the CAMT pot for partnerships and corporations
The Essential Practice of Bank and Credit Card Statement Reconciliation
Are American progressives making themselves sad?
-
Economics1 week agoYoung Americans are losing confidence in economy, and it shows online
-
Economics1 week agoPCE inflation February 2025:
-
Personal Finance1 week agoStudent loans could be managed by the Small Business Administration
-
Accounting7 days agoIRS sets new initiative with banks to uncover fraud
-
Economics1 week agoWhite House denials over the Signal snafu ring hollow
-
Economics1 week agoConsumer sentiment worsens as inflation fears grow, University of Michigan survey shows
-
Economics1 week agoTexas troopers are in more and more lethal car chases
-
Personal Finance1 week agoMillions of student loan borrowers past-due after bills restarted: Fed