States Deducting Social Security Benefits from Unemployment Payouts

Bill Taylor was hit with a double whammy in the fall of 2000. After 16 years as an office equipment technician, he suddenly found himself without a job when his employer announced a round of cost-cutting layoffs. Then, when he filed for unemployment benefits, he was told he didn't qualify because he was drawing Social Security and couldn't receive both.

Taylor, now 74, has never quite recovered. He's still looking for work to help make ends meet. He and his wife get by on $2,200 a month (from a civil service pension and Social Security), which, he says, isn't even enough to cover basic expenses.

"It's a real struggle," Taylor (not his real name) told the AARP Bulletin.

Taylor and his wife live in Virginia, one of 21 states that deduct Social Security income from the unemployment compensation that individuals would otherwise receive.

Every month, thousands of older Americans get just such a rude awakening when they file for unemployment insurance benefits. Under a 1980 amendment to the Federal Unemployment Tax Act, states must subtract from unemployment benefits any pension payments from employer-financed plans. States may also subtract other forms of retirement income, including Social Security.

The Social Security "offset," as it's called, has come under fire in the wake of layoffs that have spread through the nation and hit older workers particularly hard.

"This law either forces older workers to spend their retirement savings while they search for jobs," says AARP labor economist Clare Hushbeck, "or pushes them out of the labor market into unwanted retirement."

Congress has generally given the states wide latitude in establishing eligibility requirements for their unemployment insurance programs. Since 1980, however, it has required states to restrict eligibility so people receiving pension payments couldn't "double dip" by collecting unemployment benefits at the same time.

But when workers have paid into a retirement program, such as Social Security or a 401(k) plan, the law allows states to take their contributions into account.

Nonetheless, many states ignore that provision, according to Rick McHugh, a staff attorney with the National Employment Law Project, a New York-based worker advocacy organization. Some go so far as to deny unemployment benefits to workers who've rolled over assets from an employer-sponsored 401(k) plan into an Individual Retirement Account (IRA)—even if they haven't withdrawn a dime in the process.

While some states' policies are clearly written into statutes and regulations, others are obscurely rooted in administrative rulings or case law. The result is a crazy quilt of rules that even experts in the field have trouble tracking.

Of the 21 states (plus the District of Columbia) that deduct Social Security from unemployment insurance, some deduct it dollar for dollar, while others subtract a fixed percentage—typically 50 percent.

"It's a pathetic way for states to save money—on the backs of people who are just trying to get by," Hushbeck says. "And it has long-term implications because more and more people are staying in the labor force longer."

At least three states—Iowa, Mississippi and Wisconsin—have recently changed their laws to phase out Social Security offsets. Officials in those states told the Bulletin that the aging of the work force and a desire not to penalize older workers prompted the changes.

Many of the nation's largest employers, however, favor offsets to unemployment insurance and are likely to lobby vigorously against efforts in various states to eliminate the Social Security deduction.

Providing benefits under both systems undermines the incentive to return to work, says Eric Oxfeld, the president of UWC—Strategic Services on Unemployment & Workers' Compensation, which describes itself as "the voice of business" on these issues.

Moreover, employer groups warn, any additional burdens on the states' unemployment trust funds could put the system at risk.

But the National Law Employment Project's McHugh suggests that this may be the right time to push for change. "There's a lot more sympathy for the unemployed than there was before Sept. 11," he says. "And because of the recession, many more people are finding themselves in this situation than ever before."