How Can the US Knit a Smarter Safety Net?

“Without government assistance, the number of people in poverty would have risen in 2020 by 8 million, the second-largest amount on record,” noted Sharon Parrott, president of the Center on Budget and Policy Priorities, a nonpartisan research and policy organization, during a 2022 House Budget Committee hearing.

Per Parrott, “While some of the difference in the two recoveries stems from differences in the downturns’ causes, some is clearly due to the strength of the policy response to the pandemic.” While some economists decried the massive stimulus in 2008, she added, it “proved to be undersized and ended too soon.”

There has, of course, also been criticism about the pandemic stimulus—including that it helped stoke inflation that eventually hurt many of the households it was meant to aid.

Lessons about unemployment insurance from two chaotic job markets

“If all you were trying to do as a policymaker was get us out of a recession, you would want to give a bunch of money specifically to unemployed people before you did something like untargeted stimulus checks,” says Chicago Booth’s Pascal Noel.

During the Great Recession, the federal government supplemented state UI programs to allow extensions of up to 99 weeks. The Recovery Act also incentivized states to enhance benefits to part-time workers and people with dependent children.

Likewise, in response to the swift and massive rise in job losses during the pandemic, the US government implemented a historic expansion in federal UI benefits. In addition to lengthening the duration of UI benefits, pandemic unemployment assistance provided a weekly $600 supplement (later reduced to $300) and extended eligibility to the self-employed.

The supplemental payments plus regular UI benefits had lower-income workers temporarily earning more than they did while working. These payments also injected billions of dollars into the economy, helping to power the recovery.

By the final quarter of 2021, the US government had funneled about $650 billion to states to manage these programs. Ultimately, eligible recipients were able to collect up to 79 weeks of UI.

The extra help to unemployed workers made a substantial difference in both cases. A review by the Center on Budget and Policy Priorities’ Nick Gwyn reports that, without the UI response, approximately 5 million more people would have fallen below the poverty line in 2020, and up to 6 million more in 2021.

Meanwhile, a 2014 White House report found that extended Great Recession UI benefits helped lift close to 11 million people out of poverty from 2008 to 2012. And a 2018 study by University of Michigan’s Joanne W. Hsu, Northwestern’s David A. Matsa, and Dartmouth’s Brian T. Melzer found this UI assistance may have prevented more than 1.4 million foreclosures.

Still, while unemployment during the Great Recession peaked at 10 percent and soared to nearly 15 percent during the pandemic, there was a marked difference in recovery time. The Great Recession–fueled unemployment rate didn’t return to precrisis levels until 2016, more than eight years after the crisis began. The pandemic-era unemployment rate took just two and a half years to return to pre-COVID levels.

The relatively quick rebound in employment levels during the pandemic came despite a notable complication: delays in benefit delivery, in part because the old technology used by state systems left them overwhelmed by the volume of claims. “You had lots of people right at the beginning of COVID who really needed the money who had to wait six weeks or longer to get it,” Noel says.

To prepare for the next big crisis, he suggests, a focus on investment into the unemployment system across all states could allow a higher volume of claims to be processed. His research with Ganong and other coauthors finds that people who had to wait for their UI benefits ultimately had far lower consumption levels than those who received their money earlier, even though the missed payments were made up for.

Research from Harvard’s Samuel G. Hanson and Adi Sunderam, in collaboration with Booth’s Eric Zwick, concurs that glitches in statewide UI infrastructure during the pandemic highlighted the need to invest in upgrading systems to “ensure timely receipt of benefits for large numbers of workers, changes to benefit formulae, and the possible extension of benefits to the self-employed.”

Focusing on lessons learned from small-business assistance during the pandemic, Hanson, Sunderam, and Zwick outline design improvements to manage these challenges in the next crisis. Small-business aid should be a complement to, not replacement for, traditional unemployment insurance, they say, and should typically be more generous during times of serious catastrophe than during “garden variety” recessions.

The researchers consider that in another pandemic-like crisis, UI systems—due to technology or funding issues—would still be unprepared to enroll a large number of workers quickly. Thus, if businesses are forced to furlough or lay off workers, aid to the firms can be used as a channel to pay unemployment insurance directly to employees.

Instead of automatic forgiveness, says Zwick, loan repayment should be conditional on how well the business itself fares. “If the firm ends up doing OK, then the loan needs to be paid back,” he says.

“Ultimately,” write Hanson, Sunderam, and Zwick, “aid to businesses and households should be paired to ensure that once the crisis ends: (1) household balance sheets are strong enough to drive a recovery in spending; and (2) business balance sheets are strong enough to drive a recovery in employment and investment.”

Research by Noel, Ganong, Vanguard’s Fiona Greig, JPMorgan Chase’s Daniel M. Sullivan, and Booth’s Joseph Vavra also finds that the extra money sent to those on unemployment during the pandemic appears to have played a significant role in helping sustain household consumption. Consumer spending rose when the $600 supplements began in April 2020, fell when they ended in July, and then rose again when the $300 supplemental payments began in January 2021, the research indicates.

“Most strikingly, we see that while the $600 supplement is available, the spending of unemployed households rises after job loss, both in absolute terms and relative to the spending of employed households,” the researchers write.

What of the concern surrounding extended benefits and supplemental payments dissuading people from job hunting? Multiple studies found they weren’t justified.

A report from the Federal Reserve Bank of San Francisco’s Nicolas Petrosky-Nadeau and Robert G. Valletta finds that the $600 in supplemental payments “had little or no effect on the willingness of unemployed people to search for work or accept job offers.” Petrosky-Nadeau and Valletta say that the dismal state of the labor market meant job seekers didn’t have the luxury to be choosy. In a stronger labor market, they write, disincentive effects could increase.

UI in noncrisis times

The spending boosts observed in response to UI supplements during the pandemic were a reversal of the typical spending decline that occurs among the unemployed. Pre-pandemic research from Ganong and Noel looked closely at spending patterns of unemployed workers, finding that households are typically not financially prepared for job loss. The research suggests that extending the time period in which people receive benefits, rather than raising monthly benefit levels, is most effective, largely due to people’s spending habits.

Studying 200,000 US households affected by unemployment from 2014 to 2016, the researchers find that spending plummeted when people first lost their jobs, and then dropped again as their payments ran out, even though they knew when payments would end. Because so many people aren’t prepared to manage their finances when they lose their income, boosting the amount given isn’t ideal, as recipients will just continue to spend until their UI period ends. Thus, extending that support period and giving people time to better plan their spending is optimal.

“Basically, in the US, if you have a job and you lose it, you get unemployment insurance and you get 50 percent of your prior wage for six months and then you get zero,” Noel says. “As a social planner, I’d rather give a dollar when the person’s down at zero rather than when the person is at 50 percent.”

Research by Harvard’s Gabriel Chodorow-Reich, Ganong, and MIT’s Jonathan Gruber examines the viability of implementing statewide triggers during crisis times that automatically extend unemployment benefits beyond the 26 weeks most states allow for. Under current law, a state can enter into an extended benefit period of about 13–20 weeks if its insured or total unemployment rate goes beyond legislated thresholds, the researchers note. However, states may opt out of the less stringent trigger thresholds. Also, 13–20 weeks may not be enough, but it has taken federal legislation to extend benefits beyond this, the researchers say.

They constructed simulations in which benefit extensions would be paid automatically once a state’s unemployment rate rises beyond a certain percentage. One model allows for a 13-week extension when the rate goes above 5.5 percent, 25 weeks at 6.5 percent, 39 weeks at 7.5 percent, and 52 weeks at 8.5 percent.

The researchers find automatic extensions would not be costlier than similar federal programs. They do note potential hitches—for example, triggers could hit for a state that experiences a short-term crisis from which there is a fast recovery. However, automatic triggers may alleviate financial uncertainty for households experiencing unemployment.

Noel says there is room to consider whether UI overall should be boosted beyond 50 percent income replacement. In a chapter in the 2022 book Recession Remedies, Ganong, Greig, Noel, Sullivan, and Vavra note that “with a typical replacement rate of 50 percent, regular UI benefits cannot sustain families over extended periods of time; as a result, temporary supplements might be appropriate, especially during recessions.”

They argue that it’s worth considering more permanently broadening UI eligibility to self-employed workers. To help manage this, the federal government could provide technology and data infrastructure to states that would enable flexible benefit levels for more people and a smoother eligibility verification process.

Preventing a financial crisis from becoming a mortgage crisis

Between March 2020 and May 2021, more than 70 million Americans with loans worth about $2.3 trillion—mostly mortgages and student debt—entered forbearance as part of COVID relief. One-fifth of these borrowers continued to make full payments, notes a study by Stanford PhD candidate Susan Cherry, University of Southern California’s Erica Jiang, Northwestern’s Gregor Matvos, Columbia’s Tomasz Piskorski, and Stanford’s Amit Seru, “suggesting that forbearance acts as a credit line.” By May 2021, about 60 percent of these borrowers had exited forbearance.

It was during this time, in spring 2020, that the unemployment rate surged to nearly 15 percent. The researchers note that, historically, high unemployment rates correlate strongly with mortgage defaults. In this case, however, “the actual default rate averaged below 2 percent instead of a predicted 6.8 percent at its peak.” This was in stark contrast to the Great Recession, when mortgage defaults climbed from about 2 percent to over 8 percent, according to a separate study by Seru.

While other COVID-relief policies such as expanded unemployment benefits also played a role in limiting delinquency rates, Cherry and her coresearchers note, “a back-of-the-envelope calculation suggests that the level of forbearance is large enough to account for averted potential delinquencies in the mortgage market.” These low delinquency rates help at least in part explain why home prices didn’t decline, per the researchers.

More than half of that $2.3 trillion was mortgages, the research indicates. Noel says that because mortgage forbearance was easy to opt into, “it was able to concentrate the help on the people that actually needed it.” During the Great Recession, he says, “we didn’t go far enough in terms of providing people with short-term liquidity.”

The main government debt-relief policy for mortgage holders during this period was the Home Affordable Modification Program, through which approximately 2 million borrowers received loan modifications. A key difference between this program and the pandemic forbearance policy is that HAMP was a complicated mortgage modification program, says Noel, requiring borrowers to enter into a brand-new contract with new terms and underwriting.

The key objective for HAMP was to reduce borrowers’ payments to 31 percent of their income for at least five years. This involved a multistep modification process that meant the level of new payment varied according to each borrower, as did the exact terms of the modified mortgage contract.

Noel notes that while HAMP provided needed assistance to millions of borrowers, three big challenges may have limited its impact. For starters, the strict documentation policies, while eventually relaxed, made it far too difficult for borrowers to obtain a modification. Secondly, HAMP required a lot of effort from overloaded servicers. Finally, HAMP offered more-drawn-out relief, while post–Great Recession research suggests immediate liquidity problems are the key driver of mortgage delinquencies.

In fact, 2020 research from Ganong and Noel suggests that, in a crisis situation, principal mortgage reductions that leave short-term payments unchanged have no meaningful effect on default rates, while short-term payment reductions can decrease defaults significantly—essentially, a 1 percent payment reduction reduces default rates by the same percentage amount. “It’s a shorter-term cash crisis,” says Noel. “It’s because they lost their jobs for a few months or they had a health shock and they need to make a payment.”

During the Great Recession, he notes, policymakers weren’t as sure why borrowers were defaulting. Was it because they didn’t have enough cash to make their payments today? Or was it because they were treating their homes as a financial asset and deciding to walk away because they were underwater on their mortgages?

“Are you treating it just like an investment, or is there something special about a home because it’s where you live?” he asks.

While there was some focus on liquidity provision during the Great Recession, Noel says, energy was also spent on permanently reducing payments through principal forgiveness that reduced debt not just in the present but also in the long run. This was in part to try to capture more of the strategic defaulters who chose to walk away from underwater mortgages.

However, additional research from Ganong and Noel from 2022 finds that, overall, strategic defaults account for only 6 percent of the total. Meanwhile, 70 percent of defaults are driven by negative life events, such as a job loss or a health issue, that cause short-term cash-flow problems.

“If you really want to help households keep their homes, you need to focus on what for most people is a shorter-term liquidity crisis,” says Noel. And thus, he adds, the pandemic response, in which people were given the choice to pause their payments for three months, six months, or a year and then have those payments tacked on to the end of their mortgage terms, was both better for borrowers and far less costly and complicated for lenders than the Great Recession response.

This strategy can translate in noncrisis times, Noel says. “If you lose your job, if you have a concentrated financial difficulty, something like forbearance is actually much, much better for you than the kinds of payment reductions that were tried in the Great Recession.”

The pandemic forbearance program ended in May 2023. However, individual lenders can still offer forbearance in noncrisis times, along with a variety of other services designed to help distressed borrowers. One postpandemic relief program, rolled out in February 2024, is the Federal Housing Administration’s Payment Supplement, designed to help borrowers who can’t utilize current FHA services because their interest rates are lower than current rates. It offers a temporary 25 percent reduction in mortgage payments without any modifications.

Noel suggests borrower relief could be more efficient if it were baked into the original contract. For example, rather than have forbearance or payment reduction be a postcrisis negotiation between the borrower and the lender, the mortgage can be fashioned to include provisions for such possibilities. “How should we design mortgages given what we learned about why people default?” he asks.

In that vein, research by Boston University’s Adam M. Guren, Stanford’s Arvind Krishnamurthy, and University of California at Berkeley’s Timothy J. McQuade finds that mortgages that automatically raise payments during booms and lower them during recessions may do better for society at large than those with fixed payments. In a life-cycle simulation model that mimics a crisis in which the Fed lowers real interest rates in a bust, they find that this type of design can cause 23 percent fewer mortgage defaults.

Specifically, their model features a price foreclosure spiral in which homeowners default, pushing down prices, causing more homeowners to have negative equity and be at risk of default. “As a result, in a housing bust, mortgage designs can have much bigger effects on prices and defaults than in models where one does not have prices that respond to demand,” Guren says. “That is the reason it is best to front-load payment reductions in a housing-led recession when there are more negative income shocks that can trigger default and more people are underwater.”

Unburdening student borrowers—selectively

Student loan relief was one of the defining pandemic aid measures, with payments automatically paused and interest rates set to 0 percent for all federal loans from March 2020 until September 2023. While forbearance and deferment options are always available, never before had there been an all-encompassing pause like this one.

Noel says this may have been one area in which government relief was overly generous. “With mortgages, you had to raise your hand and say, ‘I need forbearance,’” he says. “For student loans, it was automatic. Every single person got the student loan forbearance, whether they needed it or not. And that was actually pretty costly to the government.” Some estimates, such as one by the Committee for a Responsible Federal Budget, have put the total cost of the pandemic student loan pause at about $200 billion.

In general, Noel says, forbearance is better when based on need.

Research has indeed found that student loan pauses are less progressive than many other safety-net policies in that they most benefit higher-income borrowers. Per a 2020 report by Diana Farrell, who was then at the JPMorganChase Institute, Greig, and Sullivan, the annual median payment for borrowers with $30,000 in yearly income was $1,605 from December 2015 through November 2016, while borrowers earning $117,000 per year made an annual payment of $2,700. Further, “extremely large payments . . . are far more likely for high-income borrowers,” the researchers find.

This doesn’t mean households all across the income spectrum don’t benefit from student loan pauses—it’s more that the total value of such pauses is largest for those with higher incomes.

Beyond temporary payment pauses, student loan forgiveness and other federal programs that help alleviate the burden on graduates have been a focus in the US as student loan debt has ballooned to more than $1.6 trillion. Over 90 percent of that debt is from loans owned by the federal government.

Among the many ways the government can assist student loan borrowers, forgiveness of some or all student debt is one of the most controversial. The Biden administration made forgiveness a core part of its policy platform, and faced multiple legal challenges. In 2023, the Supreme Court struck down the administration’s $400 billion forgiveness plan, which would have entirely wiped out student loan debt for about 20 million borrowers and partially forgiven debt for another 20 million. The administration was, however, able to extend forgiveness to borrowers through existing programs.

But student loan forgiveness overall does not focus on the right recipients, says University of Cambridge’s Constantine Yannelis. “Student loan forgiveness is a massive handout to upper-class people,” he says.

Research by Duke’s Michael Dinerstein, Chicago Harris’s Dmitri Koustas, Yannelis, and MIT PhD student Samuel Earnest studied the effects of forgiveness on 3 million borrowers. At the time of the study, over $130 billion had been discharged, with an average of $44,000 per borrower. (By the end of Biden’s term, total relief was at nearly $189 billion for 5.3 million borrowers, including the December 2024 approval of over $4 billion in forgiveness for nearly 55,000 public service workers.) The researchers find that, although debt-relief programs are generally targeted to lower-income households, borrowers who received loan forgiveness in this case earned “slightly more than other student loan borrowers,” suggesting that targeting is not as effective as it should be.

In research with University of Pennsylvania’s Sylvain Catherine, Yannelis also finds that under universal loan forgiveness, the average person in the top earnings decile would receive $6,267 in forgiveness, while the average person at the bottom would receive $1,276.

Even as forgiveness policies take aim at the lower end of the income scale, Yannelis notes that such targeting doesn’t work because it’s not current income but income over the long run that matters. “Many people with high student debt, such as medical residents, have low earnings for a few years and then go on to make a lot of money,” he says.

His research with Dinerstein, Koustas, and Earnest finds that not only was targeting subpar, but student loan forgiveness led to increases in mortgage, auto, and credit card debt. Using administrative credit bureau data, they find that for each dollar of forgiveness, other debt increased by 8.8 cents, particularly in the mortgage category: “Borrowers experiencing forgiveness increase mortgage borrowing by $2,300, auto loan borrowing by $230, and credit card borrowing by $220,” the researchers write.

Ultimately, says Yannelis, “It’s a misnomer to call student loan forgiveness a progressive policy in terms of the income distribution. That doesn’t mean nobody should get forgiveness. What should happen is that if the government wants to redistribute money, the government should give forgiveness to low-income borrowers.”

Some politicians have suggested approaches to student loan forgiveness that would mostly target the very lowest on the income scale. For example, during his 2019 presidential campaign, former US housing secretary Julián Castro offered a plan for partial loan forgiveness for anyone receiving public assistance benefits—SNAP, Medicaid, or Supplemental Security Income—for three years within a five-year period.

A point that is sometimes missed, Yannelis says, is that there already exists a large, effective loan forgiveness program for low-income borrowers: income-driven repayment plans, an umbrella term for programs including the Pay As You Earn, Income-Based Repayment, and Income-Contingent Repayment plans. IDRs are progressive, says Yannelis, because they work directly with a borrower based exactly on the level of income they currently have. A low-income borrower will make very low or even no payments, but will increase them as their income grows. If, after 20 or 25 years, their loan is not paid off, they can receive full forgiveness.

In 2023, Biden introduced a new IDR plan, Saving on a Valuable Education. Among its features are immediate forgiveness for borrowers who took out less than $12,000 in loans and have made at least 10 years of student loan payments; an interest subsidy; and an increase in the income exemption from 150 percent to 225 percent of the poverty line. This means those who earn less than 225 percent of the federal poverty level may not need to make any monthly payments at all. SAVE was put on hold after a July 2024 US Court of Appeals order, and enrolled borrowers’ payments have been put in temporary forbearance.

“The SAVE Plan is mostly a step in the right direction,” says Yannelis. “It is a way of targeting forgiveness to those with persistently low incomes, as opposed to blanket policies, which mostly put dollars into the pockets of well-heeled individuals.”

As SAVE was implemented, the Pay As You Earn and Income-Contingent Repayment plans were put on hold for new borrowers. However, with SAVE in legal limbo, those plans are again open to those borrowers.

Yannelis suggests that to strengthen its IDR programs, the US could adopt automatic enrollment in these plans, following Australia and the United Kingdom. In addition, he says, forgiveness, including IDR, should be treated as a nontaxable event.

Before 2021, forgiveness was taxed like income; pandemic legislation paused this up to 2025. If new legislation doesn’t address this issue, borrowers could find themselves with large tax bills at the end of their IDR periods. “Imagine you’re a low earner for 20, 25 years, and you’re suddenly hit with a massive tax bill on this balance that you’ve never paid,” Yannelis says. “It’s completely absurd.”

Toward the end of Biden’s term, his administration officially withdrew its plan B to offer student loan forgiveness to 25 million borrowers, with the Education Department citing “operational challenges.” This move was widely interpreted as an acknowledgment that the Trump administration would be very likely to ultimately kill the proposal.

Expecting the unexpected

Precarious though it may be, financial stability for US households has risen in the past decade, according to some of the Fed’s measures. The 37 percent of people who would struggle with a $400 expense is down from 50 percent in 2013. In 2023, 72 percent of people said they were at least “doing OK” financially, up from 62 percent 10 years earlier. Though those figures are down a bit from recent highs, broad improvement in such measures may be the best way to insulate households from financial calamity.

“I don’t expect the Trump administration to make strengthening the social safety net a priority,” Zwick notes. “But if there is an economic downturn, I expect them to follow the lead of Congress, for example, in providing expanded unemployment insurance benefits or aid to business.”

Such a downturn may be hard to see coming, as recent crises have made evident. Policymakers have to be ready to apply the insights gleaned from experience, so as to react effectively and efficiently. In the meantime, they can use those insights to improve the assistance they provide to individual workers and families beset by the various challenges that pop up every day across the economy.

The Great Recession and the COVID pandemic were financially harrowing for millions of people. The next crisis, whenever it arrives, will surely bring substantial difficulty as well. But with the benefit of years of experience and troves of data, the research community is helping policymakers be better prepared.