Last week, Senate Finance Committee Chairman Ron Wyden (D-OR), and Ranking Member Mike Crapo, (R-ID) released a framework for future legislation to improve the Unemployment Insurance (UI) system’s ability to detect and prevent fraud while protecting access for eligible workers. Unemployment insurance was a valuable lifeline for many families during the COVID-19 pandemic. Still, the pandemic exposed many weaknesses in the UI system. While many individuals couldn’t access unemployment benefits until months after losing their jobs due to the spike in claims and limited capacity for states to process claims, criminal actors managed to steal over a hundred billion dollars in fraudulent claims.

This underscored the need for serious UI reform. The Wyden-Crapo framework is a good first step towards this.

The framework has three elements: giving states better incentives to investigate and recoup fraudulent payments, mandating that states participate in data-sharing activities, and improving administration and financing.

Better incentives for states

The UI program is run by individual states. During the pandemic, the federal government provided the necessary funds for states to provide the extraordinary UI benefits, but states were still the administrators of the temporary programs. If a state discovers and recoups a fraudulent payment (initially allocated out of federal funds), the recovered monies would be returned to the federal government. 

In other words, states do not currently have any “skin in the game” to invest substantially in additional fraud detection and capture programs, while the federal government does not have the on-the-ground administrative capacity to capture fraudulent payments themselves.

Under the proposed framework, states would be allowed to keep up to 25% of any fraud funds that they can locate. This could incentivize states to devote more resources to pursuing fraud.

In addition, states have greater leeway to decide which payments to pursue. On the one hand, the statute of limitations for UI fraud has been lifted from 5 to 10 years, giving states more time to investigate fraud. On the other hand, states are given the authority to waive non-fraudulent overpayments (for example, when funds were distributed without proper paperwork). This gives states more leeway in focusing their efforts on going after the large international crime rings that were responsible for the bulk of fraud instead of workers who made an error in the initial paperwork.

When this incentive program was proposed in the Protecting Taxpayers and Victims of Unemployment Fraud Act, we expressed concern about its financing, which came from eliminating funds that had previously been reserved for federal fraud prevention efforts. As the Wyden-Crapo framework moves into legislation, lawmakers should avoid this approach and maintain funding for both federal and state-level efforts. Legislators can craft an incentive structure that pushes state governments to investigate UI fraud and overpayment–even as they pursue opportunities to ensure more sustained, reliable federal support for UI administration. 

Mandated data sharing

Second, states would be required to use systems like the National Directory of New Hires, State Information Data Exchange, and Integrity Data Hub. These systems help states to check employment history, process claims, and detect improper payments. Using these systems also makes it easier to share information across states. A significant limitation during the pandemic was that incompatible state programs could not be reconciled in real-time, so fraudulent actors could apply for and receive UI benefits in multiple states. In April 2022, the Department of Labor Inspector General estimated that over two-thirds of fraudulent payments went to multi-state claimants.

Any legislation based on this framework would ideally require participation in every available data platform and utilize all the offerings provided through each system. For example, the State Information Data Exchange System (SIDES) has six different modules, ranging from the Monetary and Potential Charges Exchange (which notifies employers about incoming UI claims and verifies that wage information is correct) to the Earnings Verification Exchange, which checks UI claimant data against new hire directories,  to assess whether any UI claimants are receiving improper payments.

Most states already participate in one or more SIDES modules. The final legislation should specify which modules are mandatory (ideally, states would participate in all of them).

Improved administration

Finally, the framework includes new requirements for state administration and operations, reflecting a growing consensus among federal lawmakers on a substantial need for better UI administration and technology demonstrated by COVID-19.

More extensive requirements for state agency modernization will ideally be paired with funding for technology and software upgrades provided consistently and steadily. While states may sometimes benefit from large sums of one-time assistance, as senior fellow Jennifer Pahlka points out in her recent book, the best practice in software development is to provide steady funding. This allows states to plan and implement changes over time consistently, instead of trying to rebuild whole systems in one big push.

The Wyden-Crapo framework outlines ways to improve the unemployment insurance system. The suggestions could help prevent fraud and give a foundation for more administrative improvements, such as those we proposed last fall. We look forward to seeing the legislation develop.