Policymakers must strike a fiscal balance to ensure the long-term health and solvency of social insurance programs. Whether at the federal level with Social Security or the state level with Unemployment Insurance (UI), the ability of these programs to provide hard-earned benefits depends on raising sufficient revenue through tax contributions.
While Congress sets broad parameters for state UI programs, states have significant flexibility in how they fund benefits and have used various tactics. These contribution and benefit decisions don’t always align, though. A recent study identified three common approaches influencing a state’s ability to sustain a healthy UI program. There is a limited approach that pairs low benefits with low contributions, a balanced approach that maintains moderate benefits and contributions, and an unbalanced approach that offers moderate benefits but inadequate contributions.
Unbalanced scenarios often emerge when lawmakers fail to update contributions rules over time – such as in California – or when they expand benefits without corresponding changes in revenue. While more substantial benefits help workers stabilize household income and allow time for quality job searches – both valuable policy goals – misaligned cost and revenue levels put these programs at greater risk of insolvency.
To maintain fairness and financial stability, policymakers must consider benefit- and contribution-side adjustments in tandem. Raising the top UI benefit level secures middle-class workers comparable wage replacement rates to lower-income workers. Simultaneously increasing the taxable wage base – the amount of employee wages that unemployment taxes are applied to– would help offset the higher cost and ensure that middle- to high-income jobs fund the program at more proportional rates to lower-earning roles.
Michigan’s recent UI reforms illustrate these dynamics. State lawmakers raised the maximum weekly UI payment and will automatically adjust the level for changes to the cost-of-living, but did not couple the increases with updates to the taxable wage base. The Michigan UI program will likely become destabilized over time without additional reforms.
Michigan’s long overdue benefit expansion
Michigan lawmakers passed a notable set of reforms to the state’s unemployment insurance (UI) program in December. The most important changes were raising the maximum weekly benefit amount–last updated in 2003–and adjusting the maximum benefit duration period.
Before these changes, Michigan’s maximum unemployment benefit was $362 per week for 20 weeks. Under the new reforms, unemployed Michiganders will be eligible for up to $446 per week in 2025, $530 per week in 2026, and $614 per week in 2027, with the maximum benefit indexed to inflation starting in 2028. Additionally, the maximum duration was increased from 20 weeks to 26 weeks, aligning Michigan with most other states.
These benefit reforms will primarily support middle-class workers. Unlike the $600 pandemic-era top-up provided to all UI claimants, eligibility for the eventual $614 weekly maximum will depend on prior earnings.
To receive the maximum benefit of $362 in 2024, a worker needed to earn $8,829 in their highest-earning quarter–equivalent to an annualized salary of $35,317–during the qualifying base period (the past 4-5 quarters). Only those earning above this threshold will see increased weekly benefits due to the reforms. The figure below presents this dynamic, where just workers with salaries exceeding $35,317 are shown to receive a revised weekly benefit amount (blue line).
Despite concerns about excessive generosity, the proportion of prior income replaced will remain modest while significantly reducing the middle-class worker penalty that has accumulated over time. For context, covering basic necessities–housing, food, utilities, healthcare, and transportation–typically requires an average of two-thirds of a worker’s income.
Before the reforms, a worker with a 25th percentile salary in the state would receive UI benefits covering 53% of their prior gross weekly income. Anyone earning more had a smaller proportion of their income insured:
- A worker at Michigan’s median ($46,940) saw 40% of prior wages covered;
- A 75th percentile worker ($72,690) saw 26% of prior wages covered; and
- A 90th percentile worker ($103,390) saw approximately 18% of their prior wages covered in 2024.
With the reforms fully phased in, the magnitude of the middle-class penalty will be reduced and prevented from worsening. To help illustrate, workers at the 2023 median, 75th percentile, and 90th percentile earnings levels would have closer to 53%, 44%, and 31% of their prior wages covered by 2027, respectively.
*BLS May 2023 earnings data utilized
Raising the maximum benefit to $614 and indexing it does not create unprecedented benefit levels. The reform package offsets most of the erosion from inflation that has accumulated since 2003, when Michigan’s weekly benefit max was last updated. Additionally, the reforms bring Michigan more in line with neighboring Minnesota, which has replaced approximately 10% more income for its median worker (while maintaining a lower unemployment rate than Michigan).
Michigan’s missing contribution expansion
The more pressing problem is whether the current program financing structure and trust fund can shoulder these additional costs over time. As stated in the legislative fiscal note, the reforms “would have a significant negative fiscal impact on the Unemployment Insurance Trust Fund.” The same Senate Fiscal Agency staff likewise determined that:
“Had the maximum weekly benefits been in place, the total amount paid out could have been $940.1 million for the 2025 maximum, $1.1 billion for the 2026 maximum, and $1.3 billion for the 2027 maximum. For the 2027 maximum, this would have been greater than the total amount of revenue that had been received, which was $1.2 billion and would have reduced the Unemployment Insurance Trust Balance.”
Unsurprisingly, outlays will grow faster than revenues. The maximum benefit was increased and indexed, while the taxable wage base is still set at either $9,000 or $9,500 (it was lowered to $9,000 in 2025). Employers’ state unemployment tax rates continue to range from 0.06% to 10.3%, with higher rates assigned to businesses with more former employees claiming benefits. Even if solvency issues don’t emerge immediately, the risk will likely worsen unless the state’s UI wage base is regularly updated. The failure to do so contributed to substantial program debt in states like California and New York, where the issue wasn’t initially urgent.
An alternative to raising the wage base is for Michigan lawmakers to assess progressively higher tax rates on employers over time. Yet, there are notable downsides to this approach. Businesses with lower-wage workers are at a disadvantage to higher-wage employers facing similar labor turnover, since they must pay a greater share of UI taxes relative to their total payroll. Employers can be disincentivized from hiring less-established workers due to the looming risk of higher tax rates. Meanwhile, states can struggle to recover from recessions because higher rates often kick in during recovery periods. Indexation largely avoids these complications, ensuring a more stable financing structure over time.
Michigan’s legislative history underscores the importance of financially sound UI reforms. In 1980, lawmakers passed a major reform package that increased benefits, including a higher replacement rate and a larger, indexed maximum benefit. However, the package lacked sufficient fiscal-side changes, including wage base indexation. Rather than raising more program revenue, officials thought that modestly stricter eligibility criteria could offset much of the cost–provided unemployment declined.
That assumption quickly unraveled when a recession hit in 1981. Michigan had to take out federal loans with interest to cover the benefit outlays, triggering higher federal unemployment taxes. As a result, the benefit expansion was substantially rolled back several years later. The replacement rate was lowered, the weekly benefit maximum was frozen, and state taxes had to be raised to repay the federal debt.
By taking action now, Michigan lawmakers can prevent history from repeating itself. A fiscally responsible approach is to raise and index the maximum benefit and wage base simultaneously. Given that the maximum benefit is set to increase by 70% by 2027 and then adjust automatically for changes to the cost of living, lawmakers could structure wage base increases in a similar manner moving forward.
This approach closely mirrors Social Security, where the maximum earnings amount is applied to the benefit calculation, and the program tax is automatically adjusted based on an average wage index. A number of states, including Minnesota, have used this financing mechanism to their unemployment insurance programs, and the formula has been recommended in California to address its ongoing fiscal challenges. By tying UI benefits and tax increases together, lawmakers can ensure that a more consistent proportion of wages is insured and taxed over time.
Securing the benefit gains
Michigan legislators were well within their rights to restore unemployment benefits to previous levels – bringing the inflation-adjusted value of the maximum weekly benefit back to $614/week and the longest benefit duration to 26 weeks. Still, it is not enough to align Michigan’s benefit levels with those of states like Minnesota. Michigan leadership should implement forward-looking financial reforms to ensure this expansion endures over time, including raising and indexing the taxable wage base.
States considering similar expansions should also take note: Larger benefit payouts must be matched with sustainable funding.