Unemployment Insurance Fraud: Chile Has Solution

Like other government hand-out programs, the unemployment insurance system suffers from a substantial fraud problem. The Washington Post reports that 90 D.C. city employees and 40 former employees are being investigated for grabbing UI benefits to which they were not entitled. The cost of this fraud has been about $800,000 since 2009.

It's not hard to rip-off federal subsidy programs, and UI is no exception. The Post reports that "the alleged fraud is not complicated, nor is it uncommon in unemployment insurance programs: Workers apply for checks and receive them legitimately for a time but fail to inform authorities when they go back to work."

Other sources of UI fraud include the misreporting of earnings, the provision of false ID to gain benefits, and falsifying reasons for employment termination. Nationwide, the Department of Labor estimates that the improper payment rate for UI is about 11 percent, which amounted to $17 billion of wasted taxpayer money in 2010.

What's the solution? The nation of Chile appears to have found it. In 2002 it created a system of UI personal savings accounts to replace the traditional government hand-out system. The new system built on the success of Chile's Social Security personal account system. UI personal accounts help solve the fraud problem because workers would only be stealing from their own accounts if they took unjustified benefits.

There are other benefits to the Chilean system. A detailed study in 2010 found that the nation's savings-based UI system helped improve work incentives and reduced unemployment. Such accounts can also add to the long-term retirement savings of workers.

For a full analysis of the failures of our UI system and possible reforms, see my co-authored essay on DG here.