Toward Full Reform of Employment Insurance

May 15, 2008

Thank you for the opportunity to appear before this Committee to address proposed changes to Canada’s Employment Insurance system, and in particular the establishment of the Canada Employment Insurance Financing Board.

The Canadian Council of Chief Executives has for many years argued in favour of comprehensive reform of the Employment Insurance system.  In particular, we have said that the system should be managed by an independent body, with premiums flowing into and benefits flowing out of a segregated account.  We have said that premiums should be set at a level designed to break even over the course of a business cycle.  And we have suggested that the mandate of the Employment Insurance system should be narrowed to focus on protecting Canadian workers against the specific risk of temporary job loss.

The changes being proposed today take an important first step in the right direction, by setting up a Crown corporation that would be responsible for setting premiums and managing the funds collected through a segregated account.

In establishing the new account, one critical goal is rate stability.  As much as possible, we should be trying to avoid raising premiums during an economic downturn, when both workers and employers can afford it least.  To this end, the government intends to maintain the current maximum annual change in the premium rate of 15 cents per hundred dollars of insured earnings.

To ensure the new segregated account is able to cover a spike in benefits during a severe downturn, the government plans to add a cash reserve of $2 billion.   This may or may not be sufficient.  Traditional actuarial analysis has called for a cushion of between $10 billion and $15 billion.  However, demographics are continuing to drive Canada toward a structurally lower rate of unemployment. 

Furthermore, a growing share of the money flowing out of the EI fund is providing benefits for purposes such as maternity leave that are not related to the economic cycle.    Indeed, regular benefits now account for barely more than half of the total costs being covered by EI premiums. 

In short, the size of the cushion needed going forward may not be as large as it has been in the past, but a more thorough analysis seems to be required.

A related issue is how to funnel the necessary reserve into the new account.  The existing EI account has been run in surplus for many years. 

In theory, it has racked up an accumulated surplus of some $54 billion.  In practice, in the absence of a segregated account, this money flowed into the government’s general revenue account and has been used up — for tax cuts, debt reduction and spending in other areas.  

Whatever initial reserve is put into the new account will have to come out of current resources.  If more thorough analysis suggests the need for a reserve greater than $2 billion, the most practical path forward might be to shift future year-end surpluses into the EI account instead of to debt reduction until a sufficient reserve has been established. 

In the meantime, the general revenue account would have to backstop the EI account and top it up in the event of a recession severe enough to exhaust available funds.

Let me conclude by returning to the issue of longer-term reform of the EI system.  Over the years, successive governments have chosen to fund benefits for a variety of purposes through Employment Insurance premiums.  Many of these benefits would be characterized more accurately as social programs. 

While these programs may serve laudable aims, they are not consistent with the core mandate of Employment Insurance, which is to provide insurance against the specific risk of temporary job loss. 

Once the management of the system has been shifted to an independent body operating through a segregated account, the government should move such benefits out of the EI system and fund them through the general revenue base. 

The division of Employment Insurance premiums between employers and employees was based on the original insurance mandate.  This funding mechanism therefore should be restricted to the costs of that core mandate.  We recognize that the mandate of the EI system is not on the table for discussion today, but this remains a longer-term issue that should be taken into account as the governance structure and responsibilities of the new Board are determined.