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$3.3 Billion Lost in Unemployment Fraud: Study

Jeff Kowalsky | Bloomberg | Getty Images

Unemployment fraud is costing the government billions of dollars in paid benefits to people who are still working, no longer alive or are behind bars, according to a new report.

A study by the St. Louis Federal Reserve released last week found that of the $108 billion paid out in unemployment benefits in 2011, some $3.3 billion was paid out dishonestly The largest share of the fraud payments—$2.2 billion—went to people who were still working.

"It's likely that with bad economic times, the chances for fraud like this rise," said Yuzhe Zhang, a professor at Texas A&M University and one of the report's co-authors. "People are struggling economically. I think the fraud problem is going to get worse."

According to the study, individuals with relatively low earnings constitute a larger fraction of those committing fraud. High-earnings individuals, however, account for larger dollar amounts of fraud.

Breaking down the $2.2 billion shows that nearly half a billion in dollars when to the category of workers earning at least $900 a week. Those earning less than $300 a week got $210 million of the fraudulent payments.

"This shows we need a better way to monitor this type of payout," said Amy Gordon, an employment benefits lawyer at McDermott Will & Emery. "We're not doing a very good job of it."

To collect unemployment insurance, a person in the U.S. must be out of work through no fault of their own. Each worker collects benefits equal to a percentage of his or her previous earnings.

(Read More: Why Job Picture Just Got Worse)

Most benefits last for 26 weeks but since unemployment benefits are a joint state and federal program, the period can last longer.

An employee who has exhausted all state benefits can apply for federal extended benefits. Extended benefits are a joint federal-state program—though it's currently funded fully by the federal government. This program provides an additional 13 weeks of benefits to eligible employees when state unemployment rates are high.

Unemployment insurance did go up to 99 weeks for the long term unemployed during the Great Recession, but that program ended in September.

"I can have some sympathy for someone who got let go and can only find a part time job," said Gordon. "They can't make ends meet on part-time work that may be paid under the table, so they stay on unemployment."

(Read More: $2 Trillion Underground Economy May Be Recovery's Savior)

"But for the ones collecting UI benefit checks for a dead relative, those are the real bad people in this," Gordon added.

Unemployment benefit fraud has drawn scrutiny in recent years. Nearly 3,200 households making more than $1 million per year received unemployment benefits during the economic downturn, according to reports. That amounted to $80 million paid out by the government.

Other people illegally collecting benefits include prisoners. Inmates in Philadelphia's prison system fraudulently collected $7 million in unemployment benefits while behind bars in 2011. Benefits are also going to people who have died but have not been purged from the government rolls.

But not every one who should be getting benefits is collecting them. A study released last year also by the St. Louis Fed found that the amount of unclaimed benefits outweighs improper payments.

"The additional expenditures in 2009, toward the end of the recent recession, would have been a whopping $108 billion," the authors wrote. "On average, the unclaimed benefits are much larger than the more frequently discussed over payments."

(Read More: Job Picture Looks Bleak for 2013 College Grads)

That report concluded that on average, just 35 percent of the jobless have collected benefits over the past 22 years.

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