The Washington Times noted this week that the 2012 improper payment rate for unemployment insurance benefits was 11.4 percent ($10.3 billion out of $90.2 billion), according to U.S. Department of Labor data. The good news is that the figure is down from 12 percent in 2011. The bad news is that it’s still a pathetic waste of money. 

The waste, fraud, and high administrative costs associated with the program are just some of the reasons why it should be scrapped. A Cato essay on the failures of the unemployment insurance system explains: 

When policymakers dream of ways to provide subsidies and safety nets to groups in society, they rarely take into account the large bureaucratic costs that are inevitably involved. The UI system is a complex and costly system for governments and businesses to administer. 

State governments must raise taxes from almost 8 million businesses, with tax bills specifically calculated for each firm's experience rating. At the same time, the states dole out individually calculated benefits to millions of workers and monitor whether each person making a claim is currently eligible. Businesses and states need to adjudicate the many disputed claims for benefits, and states need to police UI tax evasion as businesses try to manipulate the system to get a lower tax rate. 

Federal and state UI administration cost taxpayers $5.9 billion in 2010. Despite this large cost, there is widespread concern among experts that the UI system is “in long-term decline" from an administrative perspective. UI computer systems are apparently far outdated in many states, and administrators say that they need more money to do their jobs competently. 

One problem is that state UI tax systems are very complex. There are four different experience-rating systems, and there are three different methods of determining which businesses to charge when a worker makes a claim. States have various exclusions to the UI tax base, and new businesses have special rules because they don't have an experience rating yet. Most states also impose a range of added charges to basic UI taxes, such as solvency taxes, taxes for socialized costs, reserve fund taxes, and various surtaxes. 

Employers face substantial costs to deal with all the paperwork and tax planning needed to comply with the UI system. For example, the National Federation of Independent Business notes that regardless of eligibility, “many departing employees automatically file for unemployment compensation. They have nothing to lose; filing a claim costs nothing and it puts the ball in the employer's court.” Businesses are then forced to spend time and money fighting unjustified claims. 

There is a substantial amount of waste, fraud, and abuse in the UI system. Many people try to grab benefits improperly, including people who are ineligible, people who are not actively looking for work, and people who have taken jobs and neglect to report it. Other problems include the misreporting of earnings, the provision of false ID to gain benefits, and falsifying reasons for employment termination… If you Google the phrase “unemployment benefits fraud,” you find a huge number of news stories. 

The bottom line is that government benefit programs such as UI are subject to large administrative costs and widespread abuses, which represent losses to taxpayers and the economy. The larger subsidy and benefit programs become, the larger the army of people doing paperwork and transferring wealth in society, rather than adding to wealth by producing real products.