- Consulting with Canadians -

Canadian Labour Congress Submission in Response to Finance Canada's Employment Insurance Premium Rate-Setting Mechanism Consultation:

CLC Submission to the Department of Finance Canada Regarding Recommendations for a Transparent Employment Insurance Premium Rate-Setting Mechanism

June 2003

The Canadian Labour Congress' recommendations for a transparent premium rate-setting mechanism begins with the reason for collecting premium revenues in the first place.

Workers pay EI premiums to fund a social insurance program that is there for them when they lose their job, take training, are without pay because of pregnancy, parental leave, temporary sickness, or quarantine, and for compassionate family care leave.

Up until 1994, the legislative process for premium setting was transparent. The rate for the forthcoming year was set at a level which would finance the expected benefit payments for that year. The rate could go no lower than would have been needed to cover average payouts in the previous three years, but also had to be high enough to cover any borrowing from the federal government to cover any premium shortfalls to pay insurance claims.

Before 1990, keeping premium rates relatively stable was not a major issue. The government picked up the cost of benefits due to high unemployment.

The lack of transparency in the current system, brought in with the 1996 Employment Insurance Act, arises entirely from the astonishing fact that premium rate-setting has been uncoupled entirely from any reference to past, present or future insurance payments and the larger role played by government in setting premium rates since 1994.

The premium setting provision in the EI Act (Section 66) not only stripped away the transparency, it stripped away accountability. It gives the government permission to collect premium revenues to keep the premium rate stable over an undefined business cycle. But, the Act sets no limit on annual surpluses or cumulative surpluses.

Moreover, the current provision for premium rate-setting contains no reference to the presumed purpose of collecting premiums which is to finance current, past and future insurance claims. The EI Act doesn't even define the only two things that the Commission is supposed to consider in setting rates: "stable rates over the business cycle" and the "business cycle" itself.

The EI Account has historically been viewed as a trust fund for workers — as it should be. Even after the government began treating UI revenue and expenditures as no different than any other item in the Consolidated Revenue Fund, Canadians still believed that their premiums were treated as money 'held in trust' for the sole purpose of paying insurance claims.

When the government absolved itself of any obligation to pick up the cost of insurance claims related to high unemployment as measured either nationally or regionally, there was a need to build a reserve to cover high unemployment, particularly during a recession and the early years of an economic recovery.

The CLC did support the idea of a reserve to keep premiums from rising as they did in the 1991-92 recession following the government's withdrawal of any contribution to the unemployment insurance system which, until 1990, had been directly tied to extended benefit payments due to high unemployment as measured in some 48 different UI regions.

But, these extra premium revenues collected since 1994 were paid into neither a " reserve account" nor into the Unemployment Insurance Account. They went directly into government coffers.

And, what makes this all the more painful is that these surpluses were built by massive cuts in protection to Canada's unemployed. Premium revenues have been kept at about $19 billion a year for most of the past decade while coverage for the unemployed fell from 57% in 1993 to 38% of the unemployed in 2002.

Surpluses were also built in a period when unemployment was still at recession levels along with huge cuts in premium rates. The Finance Minister says premium rate cuts will exceed $9 billion a year by 2004. Annual surpluses and premium rate cuts are a good dollar measure of the depth of cuts in protection to Canada's unemployed.

Even with the premium rate cuts by 2000, more of the EI dollars went to government than what was paid in total that year to the unemployed: $8 billion to government and $7.2 billion to the unemployed. The cumulative surplus of $45 billion is now five times the total annual EI payments to the unemployed.

The sheer size of the surplus and the government's obvious desire to avoid ever paying this money back to the EI system has led to recent pronouncements by the Finance Minister to describe the surplus as a mere bookkeeping entry – not a real legal or moral liability of government to return the money to the insurance fund. We regard the surplus as money borrowed from EI and it must be repaid.

Despite the confiscation of worker insurance for non-insurance uses by government, all Canadians expect their premiums to be collected and held in trust for the payment of insurance claims. And, there was good reason for workers to have that belief and confidence. It was governed and managed as a trust in its first fifty-four years until 1994.

Our proposals do not address how the government will repay these vast sums, but we most certainly consider it an outstanding debt to the workers of the country. The CLC recommends a five- to seven-year repayment plan with a schedule of corresponding annual improvements in benefits.

The CLC's recommendations address where we go from here even as we reaffirm our belief that government should be contributing to the human costs of public policies, or lack thereof, that lead to higher unemployment. It is unconscionable that there is no longer a price to pay for the policy failures of government despite the vast array of policy instruments that the federal government has to mange the economy.

Our recommendations can be summarized as follows:

Connecting Premium Setting to Expected Insurance Payments

Premium rate-setting must be connected to the very purpose of an unemployment insurance system — the payment of insurance claims.

In setting the rate, it should be transparent what portion of each year's premium is for the coming year; what portion is to be kept in the High Unemployment Reserve Fund of the EI Trust; what portion is related to the business cycle; and, what portion is to repay funds borrowed from government when reserves and current year revenues do not cover expenditures.

Section 66 of the EI Act simply says that the Commission, in setting premiums, consider:

• that there will be enough revenue over a business cycle to pay the amounts authorized to be charged to the EI Account; and,
• maintaining relatively stable rate levels throughout the business cycle.

The business cycle needs to be defined both in terms of projected insurance claim payments and an insurable earnings base that would grow with the economy.

The Actuary's report of the Commission should be a public document. Its contents would be similar to what has been produced over the years to determine the required rate — employment and unemployment trends, workers' earnings, etc. It would also contain the various unemployment rate projections and forecasts made by various reputable experts and institutions outside of government.

With a portion of each year's premium revenues paid into a "High Unemployment Reserve Account," the Actuary's report would need to contain greater analysis of the business cycle and other non-cyclical factors that can cause high regional or sectoral unemployment, e.g., SARS, US softwood lumber policy, etc.

The Commissioners representing employers and workers should be obliged by the Act to consult their constituencies before and after the release of the Actuary's report.

The Commission's recommendation on the rate and the portions to be allocated to the forthcoming year and reserve should be made public before the Cabinet accepts or rejects their recommendations.

Both the Actuary's report and the Commission's recommendations should be made public months before the premium setting deadline.

Reserve for High Unemployment

The most important economic stabilization function of an unemployment insurance system is replacing part of the wages of workers who lose their jobs whether its is due to a recession or high unemployment outside a recession. High unemployment should include causes other than the business cycle — technological change, seasonal factors, and one-time events or policy changes that can devastate a particular sector or region.

In other words, if premiums are to be the sole means of financing high unemployment, it is essential to set aside a portion of premium revenues for high unemployment generally, but specifically during a recession or in a recovery period immediately following a recession.

To provide transparency and proper accountability, it is important to treat all money taken from the EI Trust's "High Unemployment Reserve" for non-insurance uses by government as borrowed by government that the government must pay back with interest to the EI Trust.

The portion of the premium revenues that should go into a High Unemployment Reserve depends on a range of determents; everything from qualifying rules to how high unemployment is defined. But, we do know from the program's history that premiums have been stabilized during a recession by the government picking up one-fifth to one-third of extended benefits due to high unemployment.

The government contribution under various formulations was to cover extended benefits due to high unemployment and the cost of the necessary infrastructure to ensure that every worker in the country had the essential services and assistance for finding work.

The High Unemployment Reserve would not replace what government has historically contributed for high unemployment. It would replace what the UI Fund would have borrowed (prior to 1990 ) for the premium financed portion of benefits. The High Unemployment Reserve would pay for the higher number of claims during a recession or unemployment crisis – not the cost of regionally extended benefits due to high unemployment.

A High Unemployment Reserve in the EI Trust, in our view, does not absolve the government from what ought to be its financial responsibility for high unemployment. Moreover, there are very good economic and fiscal reasons for not having premiums carry all of the cost of benefits directly related to high unemployment.

Again, our recommendations are about where we go from here in developing a transparent EI Trust with an accountable governance system.

An Arm's Length Commission

The Employment and Insurance Commission's role in premium setting became very opaque after 1996, and eventually invisible when the government took over the entire responsibility for premium setting in 2000.

In 1996, the government gave itself even more authority over premium setting with Section 66 of the EI Act, and in 2000 when the government suspended the power of the Commission to set premiums for five years.

While the EI Act is still replete with references to Commission responsibilities, such as the power to set premiums and make Regulations for administering EI eligibility provisions, it is very difficult to disentangle where the respective roles of the Commission and the Department (HRDC) begin and end.

What we do know, however, is that the Commission lacks the necessary independence in the governance that ought to be an EI Trust Fund.

Our recommendations would increase the three "A's" of the Commission in the governance of an EI Trust. Increased Commission autonomy, authority and accountability would give the greater independence and powers of oversight with a corresponding obligation to report fully to the public without the fear of reprisal and censure by government.

In advocating an arm's length relationship for the Commission, we are not recommending a Commission with no government representation. Government representation on such a Commission is absolutely essential. The Commission should continue to be a tripartite body representing workers, employers and government.

Government representation on such a Commission is not inconsistent with an arm's length relationship to government. There are numerous examples of government institutions and agencies that must operate at arm's length to government; everything from the courts, police, administrative boards, representative tribunals, regulatory agencies, and even agencies that produce information and statistics.

With respect to premium setting, an arm's length Commission would have the resources necessary for oversight and comprehensive reporting. Premium setting is not a mere technical or mechanical exercise. The Commission should have the authority to consult "experts." Our definition of experts, however, goes well beyond accountants and economists.

An arm's length Commission must have access to a range of expertise and resources needed for evaluating the full scope of the program. The Commission must continue to have the power to make recommendations to Cabinet on some hundred or more regulations that it should continue to have responsibility for premium setting.

We are recommending that the Commission take over the responsibility for defining insurability from CCRA. This is in addition to its responsibility for making regulations on benefit eligibility.

We want EI to be publicly administered and delivered by HRDC. And, Cabinet must still make the final decision as it has always done on premiums and regulations affecting benefits.

But under our proposal, Cabinet will have to respond explicitly and publicly when it is not accepting the recommendations of the Commission.