You can't "milk the system" unless you're actively searching for employment. When I applied for government assistance, I had to bring in a bunch of photocopies of job applications I had submitted to prove that I was in fact actively seeking employment. I also had to provide proof of citizenship, proof of authorization to work in the United States, my Social Security number, and a photo ID.
Otherwise, you're absolutely right. Some people have given up on looking or a job and are finding other ways to get by. Living off the income of a spouse or generous family member is one way that it's done. Others are going to school, disabled, retired, homeless, imprisoned, or living in another circumstance where getting a job is impractical, impossible, or unnecessary.. And the job market does suck, you're absolutely right about that as well. Nobody is hiring at the entry level any more. All of the management positions are vacant, but positions for cashiers, sales associates, stockers, and other entry-level positions are completely filled with older people who lost their jobs in the 2007 mega-recession. All of the back offices are filled with stacks of dozens or even hundreds of job applications, and you have to call over and over and over and over and over again before you can start getting straight answers.
