- Consulting with Canadians -

EI Rate-Setting Consultations

Overview Report

Introduction

During the 2003 pre-budget consultations, a number of stakeholders asked the government to develop a more transparent and sustainable process for setting EI contribution rates. In response, the government launched a consultation process on a new permanent rate-setting regime for 2005 and beyond.

Five rate-setting principles, which are largely based on the pre-budget recommendations of the 1999 report of the Standing Committee on Finance, formed the basis for the consultations. They are:

• Premium rates should be set transparently;
• Premium rates should be set on the basis of independent expert advice;
• Expected premium revenues should correspond to expected program costs;
• Premium rate setting should mitigate the impact on the business cycle; and
• Premium rates should be relatively stable over time.

As part of the consultation process, interested parties were invited to submit their views on how these five principles could best be balanced and implemented. Interested parties had until June 30, 2003 to provide submissions. Some 28 submissions were received from representatives of labour and business, as well as from individual Canadians^[1].

Over the spring and summer, senior officials from the Departments of Finance and Human Resources Development Canada (HRDC) held a series of roundtable meetings with representatives of business and labour. A roundtable was also held with a panel of experts (i.e., private sector forecasters, actuaries and economists) to discuss how the last three principles -- which have considerable macroeconomic and accounting implications – could be implemented in practice. Finally, senior officials of the two Departments also met with the EI Commissioners for Workers and Employers to discuss how the principles could best be balanced and implemented.

The following provides a summary of what was heard through these various mechanisms with respect to each principle. The comments provided by the EI Commissioners have been incorporated with the other comments received from their respective business and labour constituencies.

Principle 1:
Premium rates should be set transparently

It was generally agreed that a more transparent premium rate-setting process is necessary, although somewhat different views emerged as to how this could best be achieved in practice. In this regard, the comments focussed on four areas: the role and nature of the EI Account; the status and role of the EI Commission; public reporting and consultation; and, the role of government in EI financing.

EI Account

Labour

The unanimous view that emerged from labour representatives is that the EI Account should be operated as a trust fund/account, outside of the government's books and managed by an independent, arm's length organization. It was also suggested that in reconstituting the EI Account as a trust account, it would be made "illegal" to use EI premiums for any other purpose than the EI program.

Business

Most business groups supported the idea of maintaining a separate account for the EI program. It was further suggested that a representative, independent board should be appointed to manage the account with explicit accountability to stakeholders.

Some business groups recommended that rates could be set transparently by incorporating into legislation a detailed set of rules describing the rate-setting methodology. However, other groups indicated that they would not support a "push-button" automatic premium rate calculation method.

Role of EI Commission

Labour

All labour groups argued for a reinstatement of the EI Commission, but with more independence and a strengthened role. It was recommended that the Commission operate at arm's length from government with increased autonomy, authority and accountability. It was further suggested that the EI Commission should take over Canada Customs and Revenue Agency's (CCRA) role in determining insurability. It was recommended that the Commission should be made up of representatives of employees, employers, government and other stakeholders.

Some labour groups recommended that the EI Commission should report publicly on its supervisory and regulatory activities as well as the operation of the EI Account and that there should be a regular debate on this in the House of Commons. It was frequently suggested that the EI Commission should make public the rate that it sets to allow public debate before Cabinet decides whether to accept the rate.

Many labour groups indicated that they would not support a "push-button" automatic premium rate calculation method that by definition would have no role for the EI Commission.

Business

There was considerable support expressed by business groups for reinstating and strengthening the role of the EI Commission and placing it at arm's length from the government to meet the goal of transparency. It was also recommended that the Commission be restructured to better represent employers and employees. Some groups indicated that the previous EI Commission model was good in theory, but failed in practice. They recommended that the EI Commission's role in rate setting should be either reinforced or eliminated.

Public Reporting and Consultation

Labour

Most labour groups called for an annual report to be produced by the EI Chief Actuary, which would be made publicly available.

Business

The general view that emerged from business groups is the need for a commitment from the government to consult meaningfully with the labour and business communities and other key stakeholders, as future rates are set. Some noted that they would like to see periodic reviews implemented, which could, for example, be led by the Auditor General. Other suggestions included requiring a House of Commons' Committee to conduct public consultations and report to the government and making public the independent advice used to establish premiums.

Role of Government in EI Financing

Labour

Some groups suggested that the government should repay the accumulated surplus in the EI Account over time, e.g., over a 10-year period.

Business

Some business representatives suggested that EI special benefits should be funded outside of the EI program.

Principle 2:
Premium rates should be set on the basis of expert advice

Overall, there was general agreement with this principle, although there were differing views on how this should work in practice.

Labour

Comments from labour organizations focused on the roles of the Chief Actuary and the EI Commission. Some groups expressed the view that this principle would mean a continued role for the Chief Actuary, who would be designated by the EI Commission and would set the premium rate. Others were of the view that the EI Commission would set the rate based on expert advice, including that of the Chief Actuary. Still others recommended that the EI Commission have its rate-setting powers restored and would continue as a tripartite institution with equal representation for workers, employers and government, and with its own actuary and technical expertise in labour market analysis.

Business

The overall message that emerged from business groups is that stakeholders should have a meaningful way of providing input into the rate-setting process. Specific comments were centered around two main points: the experts to be consulted and the governance structure.

Suggestions as to who would be best placed to provide expert advice included the EI Chief Actuary, employers, employees groups, economic forecasters and other knowledgeable parties or a team of economists and actuaries in the Auditor General's office or some combination thereof.

A number of business groups suggested that the EI Commission or some other independent body such as an advisory council of employers and employees on EI should provide advice to the federal government on the rate to be chosen. Such a body should have its own in-house actuary and/or other professionals and should be required to carry out consultations with stakeholders and external experts.

Principle 3:
Expected premium revenues should correspond to expected program costs

There was general support among business and labour groups that expected premium revenues should cover expected program costs over a given period of time, such as a business cycle. Comments focused on the basis upon which rates should be set, the need for a reserve and at what level the reserve should be set.

Labour

Most representatives of organized labour stressed that a reserve is needed to avoid raising rates during an economic downturn. Some participants suggested that the program also needs a reserve to cover unexpected events such as September 11, SARS and softwood lumber, which by their very nature are not "expected" program costs.

Business

Most business representatives stressed that a reserve is needed to avoid raising rates during an economic downturn.

Experts Panel

Some members of the panel suggested that consolidating the EI Account into the government's accounts was a mistake. Alternatively, others pointed out that virtually everything is now consolidated and taking EI off the government's books would go against this trend. Specifically, it was noted that the government controls the parameters of the program. Until the government's control is removed from the program, it should stay consolidated, as the Auditor General has noted.

Some participants noted that the link between EI premiums and benefits gives rise to a moral hazard problem – people feel they have a right to become unemployed, often frequently, and receive benefits because they pay EI premiums. These participants would rather see a general payroll tax that would fund EI and other social programs.

Some participants pointed out that an element of experience rating at the firm level (i.e., charging higher premiums to employers who frequently lay off employees) would have good macroeconomic and microeconomic effects as it would lower the unemployment rate.

Principle 4:
Premium rate setting should mitigate the impact on the business cycle

There was a consensus among business and labour groups in support of some level of rate stability to mitigate the impact on the business cycle.

Labour

Some groups supported the creation of a reserve as assisting in mitigating the impact on the business cycle.

Business

Two general approaches were proposed by business groups. In the first, a reserve fund or surplus would be created to ensure that the program has ample resources to operate in a counter-cyclical fashion. This suggestion was usually presented in the context of establishing a dedicated fund or the creation of an independent body to manage the EI program. In the second approach, a long-term, low and stable rate would be calculated that would, by definition, mitigate the impact on the business cycle. Other related suggestions included legislating this long-term rate and establishing the rate for a 10-year period. It was noted that an approach like this would require that the government commit to covering increased program costs in the event of an economic downturn. Some business groups also noted that, given the level of the current accumulated surplus, there would be great disappointment if rates rose when the economy slows down.

Experts Panel

This was the principle that elicited the most comments from the experts. Strong views were expressed that increases in EI premium rates had negative impacts on employment in the short run and that there is a need to ensure that EI premiums are not set in a pro-cyclical fashion (i.e., premium rates should not increase when the economy is slowing and the unemployment rate is on the rise).

Most participants advocated a forward-looking rate-setting mechanism. In this mechanism, the rate would be set looking forward over the business cycle, using the survey of private sector economic forecasts that are used for the Fall Update. It was suggested that in the context of forecasting the economy/business cycle, the "good" years (i.e., from a forecasting perspective – the year turns out largely as forecasted) would likely be matched by the "bad" years. With this method, a year that is "bad" would automatically drop off the next year as another year was added to the forecast horizon. Thus the annual adjustments to the premium rate would most likely be small. Under this method, "bygones would be bygones" with respect to the cumulative EI surplus. This process would eliminate a great deal of the pro-cyclicality in the rate-setting process. Other participants raised some concerns with a forward-looking approach. They noted that private sector macroeconomic forecasts are never right and most forecasters tend to exhibit "herd" behaviour. Few, if any forecasts, predict recessions. They also noted that a forward-looking approach could be thrown out more easily than other approaches if the forecast were wrong for two or more consecutive years.

The general consensus was that the break-even premium rate, whether set on a forward- or backward-looking basis, should be calculated over the business cycle, or at least a long enough period to ensure that the annual adjustments to rate are relatively small. Estimates of the length of the business cycle ranged from 6 to 10 years. However, it was recognized that very few private sector forecasters go beyond 3 to 4 years. Some participants argued for defining the length of the business cycle in the EI Act.

Principle 5:
Premium rates should be relatively stable over time

There was a consensus in support of having stable rates over time. Comments focused mainly on the need for a reserve, the current accumulated surplus in the EI Account and on how rates should be set in the future.

Labour

There was a consensus that a reasonable cushion or reserve should be created to weather an economic downturn, although there were differences as to how this should be created and what level it should be set at. Some groups indicated that the current accumulated surplus should mean that rates remain stable in the future. Some groups suggested that rates should be set over a longer period of time than one year.

Business

Some business groups supported the idea that a reserve, held in a specially dedicated fund, would allow rate stability. Some groups expressed the view that rates should be set over a longer period of time than one year, perhaps for 5 or 10 years. Some groups suggested setting this long-term rate below the break-even rate for an extended period of time to allow the current cumulative surplus to diminish to the $10 to $15 billion level proposed as adequate by the EI Chief Actuary. Some groups suggested placing a cap/floor on annual premium rate changes of 5 or 10 cents. Some suggested that an Act of Parliament should be required to raise the premium rate.

There was also a concern expressed with the timing of rate setting, as business requires more time to adjust to new rates. There was therefore a recommendation that EI premium rate should be set in early September or by October at the latest.

Experts Panel

Most participants agreed that rates should be adjusted annually, noting that if you were looking over a long enough period, then any adjustments are likely to be relatively small. Some participants were of the view that a stable long-run premium should be set or that a multi-year schedule of rates should be established (like for the CPP). Some participants suggested that the legislation could limit how much rates could change from year to year.

Other Comments

Beyond the discussion of the principles for EI rate setting, other premium-related issues were raised.

Labour

Some groups suggested that the EI program itself needs to be reformed and that the current cumulative surplus should be repaid through increased benefits or reduced premiums.

Business

Some business groups also suggested that the EI program itself needs to be reformed. It was also suggested that the EI program should have a Yearly Basic Exemption, similar to that in the Canada Pension Plan, where employers and employees would be exempt from paying EI premiums on the first $3,000 earned. Some groups questioned whether employers should still be paying 1.4 times the employee contribution amount, given the addition over time of more "social" policy benefits to the EI program such as parental and compassionate care benefits. In this regard, some groups recommended that special benefits (i.e., sickness, maternity, parental, compassionate care) and EI Part II benefits should be funded from general revenues and only core "insurance" benefits should be funded from premiums. Finally, many business groups raised as an issue the lack of a refund for employers who over-contribute for an employee who has reached the maximum contribution limit (equal to the reimbursement that the employee receives through the tax system).

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1. When providing their submission, interested parties were given the choice of having their submission posted publicly on the Finance Internet site. In total, seven parties chose to have their submissions publicly available on the Finance Internet site.    [Back]