August 18, 2011

Consultation Paper: Employment Insurance Premium Rate Setting

Consultations Documents:

Note: A consultation is not a poll. Please do not send multiple or duplicate submissions.

Closing date: November 30, 2011

Who may respond:

These consultations are open to anybody interested in participating.

Submissions can be emailed to ei-consultations-ae@fin.gc.ca.

Written submissions to this consultation are invited and should be forwarded by November 30, 2011, to:

Chris Forbes
Federal-Provincial Relations and Social Policy Branch
Department of Finance
L'Esplanade Laurier
15th Floor, East Tower
140 O'Connor Street
Ottawa, Canada K1A 0G5

Once received by the Department of Finance, all submissions will be subject to the Access to Information Act and may be disclosed in accordance with its provisions. Should you express an intention that your submission be considered confidential, the Department will make all efforts to protect this information within the requirements of the law.


Employment Insurance Premium Rate Setting 

By providing temporary financial assistance for unemployed Canadians while they look for work or upgrade their skills, the Employment Insurance (EI) program plays an important role in supporting Canadians and Canada’s economy and labour market. The program also provides temporary income support for eligible workers who are either sick, pregnant, caring for a newborn or adopted child or providing care or support to a gravely-ill family member. In total, the EI program provides approximately $23 billion per year in income benefits (Part I) and Employment Benefits and Support Measures (Part II) to Canadians.

The EI program is financed entirely by contributions from employees and employers, via premiums paid on insurable earnings, up to an annual limit known as the “maximum insurable earnings” (MIE), set at $44,200 for 2011.  Employers pay 1.4 times the employee premium rate. The rate is different in Quebec than in the rest of Canada because Quebec has assumed responsibility for its own maternity and parental benefits since January 1, 2006.

The Government has committed to ensuring that EI premiums are used exclusively for the EI program and that premiums are set no higher than required to pay for benefits over time. To meet this commitment, and to enhance the independence of premium rate setting, it created a new, independent Crown corporation, the Canada Employment Insurance Financing Board (CEIFB) in 2008.  The CEIFB reports to the Minister of Human Resources and Skills Development and is staffed with experienced and qualified experts who manage the financing of the EI program.

The CEIFB’s mandate is to set the EI premium rate to ensure that program revenues and expenditures break even over time. More specifically, the CEIFB is required to set the rate each year at a “break even rate” that balances cumulative EI revenues and expenses, subject to a legislated limit on annual rate changes.

The global recession created a number of challenges for the EI program as unemployment increased steadily, driving up total benefit expenditures over a relatively short period of time. Because every $120 million net increase in EI expenses results in an increase of 1 cent to the annual break even rate, the CEIFB would have had to increase premiums by 15 cents per year (the maximum increase or decrease allowable by the legislation) for three years to ensure break even financing and to recover any deficits incurred due to a greater number of EI claimants qualifying for benefits.

Instead, to help Canadian workers and employers overcome the challenges posed by the 2008-09 global recession, the Government acted in Canada’s Economic Action Plan to freeze EI premiums for 2009 and 2010 at their lowest level since 1982 (see Chart 1). This represented relief of $9.2 billion over 2009 and 2010 for Canadian workers and their employers relative to what would have been the case had rates been set at the break even rate over these two years.

Chart 1: Employment Insurance Premium Rates

The chart shows the annual EI premium rates, expressed as dollars per 100 dollars of insurable earnings, from 1982 to 2011. In 2009 and 2010 the rate was $1.73 which was the lowest the rate had been since 1982 when it was $1.65.

Given the ongoing fragility of the economic recovery, the Government took further action in September 2010 to limit the annual increase in EI premium rates to 5 cents per $100 of insurable earnings in 2011 and 10 cents in subsequent years. Without this change, the CEIFB would have had to increase EI premiums by 15 cents per year over the 2011-2013 periods. At a time when every dollar counts to individual families, this could mean almost $75 extra in the budget of the average Canadian family in 2011. Canada-wide, it will amount to $1.2 billion back in the pockets of workers and job creators.

Premium rates are projected to be lower under the new limits than would have been the case under the 15-cent limit through 2014. By design, premium rates are less volatile under the new lower limits on annual rate changes.   The rate limits mean that, going forward, premium rates will need to be set well above the annual break even rate in order to address the cumulative EI Operating Account deficit.

Based on current economic projections, it is expected that the EI Operating Account will return to cumulative balance by 2015 under the current regime. However, at that point, the annual premium rate will be well above the annual break even rate, and will only be able to decline by 10 cents per year, as the rate limits also apply to decreases. As a result, a surplus is projected to accumulate until the premium rate is eventually reduced to the annual break–even level. Rates would then need to be set below the annual break-even level for a significant period in order to eliminate the cumulative surplus.

As above demonstrates, EI premium rates are influenced by a number of factors such as labour market conditions, limitations on annual rate changes, and the cumulative balance of the EI Operating Account. These factors need to be considered when examining policy options for premium rate setting in the long term.

The recent actions taken by the Government to limit rate increases also point to the importance of preventing large premium rate increases which could jeopardize economic recovery and the need to bring the EI Operating Account back to balance over time.

To better address these considerations, the Government committed to undertake consultations with individuals and businesses on how the EI rate setting mechanism can be further improved to ensure more stable, predictable rates, while also maintaining several key principles:

  • Ensure the program breaks-even over-time;
  • Avoid large cumulative surpluses or deficits; and
  • Maintain transparency in the rate setting process.

This consultation is not about EI benefits and is focused exclusively on the EI rate-setting mechanism. In particular, the Government is seeking the views of Canadians on the following questions:

  • What is a reasonable amount of time in which the EI program should be expected to break-even? (i.e., 2 years, 5 years, 10 years, etc.)
  • What is an acceptable maximum annual change in EI premiums?
  • What should be the rate-setting process?

Interested parties can provide submissions to the Parliamentary Secretaries of the Minister of Finance and the Minister of Human Resources and Skills Development Canada until November 30, 2011 at the following address: ei-consultations-ae@fin.gc.ca