Employment Insurance: The Time for Reform is Now

November 17, 2004

Mr. Chairman, thank you for the opportunity to appear before this Committee on behalf of the Canadian Council of Chief Executives (CCCE) to discuss reform of Canada’s Employment Insurance system.

The fundamental purpose of Employment Insurance is two-fold: to help the country make the best possible use of its formidable pool of human talent, and to encourage each individual to achieve his or her full potential while providing a safety net against the unpredictable ups and downs of a dynamic economy.

Canada’s current system of Employment Insurance has its strengths, but there is almost universal agreement that it could be improved.  The federal government has recognized in particular the need for reform of the rate-setting mechanism, but more fundamental issues also need to be addressed.

The 2003 Federal Budget set out five principles of a new permanent rate-setting regime to be in place for 2005: transparency; independent expert advice; mitigation of the impact on the business cycle; stability of premium rates over time; and rates that keep revenues in line with costs.  The process of setting EI premium rates must respect all of these principles. 

The best way to ensure transparency is to turn the current guidelines into a clear and legislated set of rules and procedures.  To expand the range of expert advice, the CCCE would recommend creation of an advisory council on employment insurance, mandated by federal legislation.  Employers, who pay the majority of premiums and who make the decisions on when to hire and lay off staff, should play a prominent role in this advisory council.

More broadly, the time has come to live up to the principle that premium rates should enable the system to build up reserves during good times in order to keep paying benefits without raising rates during downturns.  As the system now stands, surpluses flow into the government’s general revenue account.  The result is that these fictional surpluses need to be drawn from general revenue at the low point of an economic cycle, at precisely the time when the general account will be under greatest pressure from falling tax revenues and rising social program costs.

It is possible to provide greater stability within the current system by setting break-even rates based on a rolling average of five to seven years.  But to respect fully the principle that rates should be stable through the business cycle, what is really needed is a segregated EI account.  Within such an account, the government could enhance stability either by mandating a maximum surplus or by using a solvency or reserve ratio, as in the United States.
 
In addition to establishing a segregated fund, it is vital to focus this fund on the basic goal of the program: that of providing insurance against short-term and unexpected job loss.  This would require two further measures in particular.

First, the insurance program must live up to its name.  Premiums paid should reflect the risks of the perils insured against.  The terms and conditions of EI must not reinforce long-term dependency on low-skill, low-wage or seasonal work.  Rather, it must encourage dynamism and flexibility within the labour force.  This implies some degree of experience rating in setting premium rates for individuals and employers.

Second, a segregated fund must be used only for the basic purpose of Employment Insurance.  Roughly half of the money raised through EI premiums is now being spent on other programs including maternity, parental, sickness and fishing benefits. 

In the CCCE’s view, the segregated account and its premiums should fund only the insurance portion of the EI system’s current mandate.  The remaining programs, which address structural rather than cyclical issues, should continue to be funded out of general revenues.  We recognize that while this could lead to much lower EI premiums, the government might have to introduce an offsetting payroll tax or other means of funding the non-insurance programs.

Let me offer one final thought with respect to the cumulative Employment Insurance surplus.  There is no doubt that for many years now, the government has been charging employers and employees far more than necessary to cover the costs of EI benefits.

However, the fact remains that we do not have a segregated EI fund.  All of the excess revenue from premiums flowed into general revenue.  All of this money has been spent — on expanding federal programs and transfers for health care, on enabling cuts in personal and corporate tax rates and on repayment of federal debt.

Whether or not you agree with the way this money was spent, it is gone.  We can no more undo the excessive EI premiums charged in the past than we can retroactively reverse the lower taxes or higher health care transfers given to Canadians over the same period.  What we can do is improve the Employment Insurance system moving forward and make sure that the errors of the past are not repeated.