Key Points

This paper finds the following:

• State unemployment insurance trust funds entered 2020 with different levels of preparedness. Those with the strongest solvency were better positioned to absorb the 2020 shock and recover afterward.
• The COVID-19 economic downturn produced a sharp solvency shock across the board. Some states were hit harder and took longer to recover, depending on their reserve levels, benefit payouts, and financing decisions.
• States that exited the federal pandemic unemployment programs earlier in 2021 generally maintained stronger trust funds and recovered faster than states that remained in the program until expiration.
• Timing mattered. States that exited earlier tended to see better outcomes, suggesting that prolonged participation may have weakened recovery.
• Arkansas, Indiana, Maryland, and Oklahoma attempted to exit the program early but were only partially successful because of legal or administrative obstacles. These cases suggest “partial withdrawal” did not produce the same results as full withdrawal.
• Debt and improper payments compounded existing problems. Although improper payments were not the primary drivers of solvency deterioration, states with higher improper payment rates tended to recover more slowly and benefited less from policy changes.
• The path forward is to replace the existing framework with personal savings-based alternatives. Personal unemployment insurance savings accounts (PISAs) may improve on the status quo, but universal savings accounts (USAs) offer a broader and potentially stronger alternative.