- Consulting with Canadians -

Canadian Construction Association's Submission in Response to Finance Canada's Canadian Construction Association:

Reforming the Employment Insurance Premium Rate-Setting Process

June 2003

Canadian Construction Association
75 Albert Street, Suite 400 
Ottawa, Ontario K1P 5E7
Tel: (613) 236-9455 
Fax: (613) 236-9526
www.cca-acc.com 

Executive Summary

CCA makes the following recommendations concerning the Employment Insurance (EI) rate-setting process:

• Reinstate identical premium rates for employees and employers, i.e. eliminate the employer multiple.
• Bring EI premiums into line with true EI program costs (plus a reasonable cushion to survive an economic downturn). Establish lower, long-term, stable/fixed rates.
• Introduce a Yearly Basic Exemption (YBE) similar to that which exists for CPP/QPP, (e.g. first $3,500 of insurable earnings exempt).
• Refund employers for EI over-contributions. Employees are refunded for excess contributions over the annual contribution limit but there is no mechanism in place to refund employer over-contributions.
• The contributors to the Fund should have a much larger role in the establishment of rates.
• Separate the EI fund from General Revenues.

Introduction

The Canadian Construction Association (CCA) welcomes this opportunity to present its views and recommendations on the review of the EI rate-setting process.

Since 1918, the CCA has served as the collective national voice for Canada's dynamic construction industry representing some 20,000 individual construction firms located from coast to coast in Canada.

CCA member firms are involved in all aspects of the construction industry with the exception of the building of single-family dwellings. They carry out industrial, commercial, institutional, road building, sewer and watermain construction, manufacture and supply construction materials, as well as build multi-unit residential complexes in a $140 billion a year industry which directly employs some 900,000 Canadians.

Canada's construction industry has played and continues to play a major role in the economic well-being of our Nation by building the physical infrastructure on which Canada's future competitiveness, social well-being and prosperity are greatly dependent.

The Need for Reform

In May 2001, the Employment Insurance Act was amended to suspend Section 66 and give the Governor in Council, on the recommendation of the Ministers of Human Resources Development Canada and Finance, the authority to set rates for 2002 and 2003, but with no accompanying criteria on how to set the rates.

The House of Commons Standing Committee on Public Accounts recommended in a February 2000 report that the Federal Government disclose to Parliament all of the factors that are used to set the EI premium rates and to determine the appropriate level of the reserve for the EI Account.

To date, the Federal Government has not disclosed or clarified the key factors used in setting the EI premium rates nor what constitutes an adequate level of accumulated surplus for the EI Account.

The Report of the Auditor General of Canada for the fiscal year ending March 31^st, 2002, stated as follows:

The Auditor General goes on in that Report to recommend that the promised and long-awaited review of the EI premium rate-setting process consider the following questions:

• What constitutes an adequate reserve and how much time is required to reach that level?
• What are the impacts on premium payers and on the purposes and intent of the EI Program in the short and long terms, where the Account balance exceeds the maximum reserve considered sufficient by the Chief Actuary of HRDC?²

The February 2003 Federal Budget announced that Finance Canada would undertake consultations on developing a more transparent and sustainable process for the setting of EI contribution rates. In particular, the following principles were highlighted:

• 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 upon the business cycle; and
• premium rates should be relatively stable over time.

Specific Recommendations

Recommendation Nº 1 - Eliminate the Employer Multiple

Reinstate equal premium rates for employees and employers, i.e. eliminate the employer multiple.

Prior to the 1971 Unemployment Insurance Act, the UI program for thirty (30) years was financed via equal contributions from employers and employees plus the Federal Government contributing 20% of the total employer and employee contributions. In 1972 the Federal Government stopped contributing 20% of the Program Funds and in 1990 ceased altogether contributing to the EI Account except in deficit situations. Also in 1972 a multiple of 1.4 was first introduced for employer contributions, which is still in force today. This means employers pay 58% of all EI program costs and employees pay the remainder. Prior to 1972 both made equal contributions.

The apparent rationale behind this multiple is that employers have greater control over layoff decisions and, therefore, should bear a higher overall share of program cots. In recent years, however, EI benefits totally unrelated to layoffs such as family-related benefits (e.g. parental leave, proposed compassionate family care leave), and training grants have contributed to much higher program costs. In fact, many of the benefits are now triggered by employee rather than employer decisions.

The rationale for an employer multiple no longer exists. Eliminate the employer multiple. Equalization of employer-employee contributions can be achieved without reducing benefits or increasing premiums by re-introducing, if necessary, the Government's 20% contribution.

As long as the EI Fund continues to cover programs unrelated to employment /unemployment issues, there is a strong argument for elimination of the employer multiple and/or the re-instatement of partial Government funding.

Recommendation Nº 2 - Set Premiums Based Upon Likely Program Costs

Bring EI premiums into line with true EI program costs, (plus a reasonable reserve to survive an economic downturn). Seek to establish low, long-term, stable rates.

The EI surplus is estimated to be currently at some $45 billion. This is far higher than the maximum surplus that the Chief Actuary of Human Resources Development Canada (HRDC) considers sufficient.³ In 2001, the Chief Actuary estimated that a reserve of $10 billion to $15 billion should be sufficient to meet the added costs of unemployment benefits during an economic downturn.

The House of Commons Standing Committee on Public Accounts recommended in February 2000 that the Federal Government disclose to Parliament all of the factors used to set the EI premium rates and to determine the appropriate level of the reserve for the EI Account.⁴ To date the Federal Government has failed to do so.

The Employment Insurance Act does not prescribe minimum or maximum contribution rates, nor does it provide for a maximum surplus.

Section 66, however, does state that the rates, to the extent possible, shall:

The intent of these provisions would appear to be that EI premium revenues would equal program expenditures over time, including a reserve sufficient to maintain rate stability during economic downturns and high rates of unemployment. The Auditor General of Canada agrees:

Large surpluses in the EI Account have encouraged the use of EI funds for non-insurance uses, (e.g. parental leave, training/developmental uses) and has fuelled demand for new schemes, (e.g. compassionate family leave). It has also been used to balance the Federal Government's books.

Bring EI premiums into line with true EI program costs, (plus a reasonable cushion to survive an economic downturn), and the intent of the governing legislation.

Return to the original intent of the EI Act. Look to establish stable, long-term (i.e. 10-year) rates based upon true program costs averaged over a projected business cycle. This would allow rates to be fixed over a business cycle (e.g. 10 years).

Recommendation Nº 3- Introduce a Yearly Basic Exemption (YBE)

Introduce a Yearly Basic Exemption (YBE) similar to that which exists for CPP/QPP, (e.g. first $3,500 of insurable earnings exempt).

Under this proposal, a prescribed amount of initial insurable earnings would be exempt from EI premium rates similar to the Canada/Quebec Pension Plan (CPP/QPP).

The Standing Committee on Human Resources and the Status of Persons with Disabilities has recommended the implementation of a $3,000 Yearly Basic Exemption (YBE) for the EI system.⁷ Under such a regime, no EI premiums would be paid by either the employer or the employee on the first $3,000 of earnings. It makes EI premiums more progressive and reduces the heavy tax burden on labour-intensive industries. A YBE of $3,500 already exists for CPP and QPP premiums.

€œThis approach is not only fairer to workers with low earnings, but also to employers who are currently required to pay premiums on behalf of workers who receive a premium refund.€⁸

Introducing a YBE in the EI program will also make it less costly and more attractive for employers to employ additional employees.

Recommendation Nº 4 - Refund Employer Over-Contributions

Refund employers for EI over-contributions.

Employees are refunded for excess contributions over the annual contribution limit but there is no mechanism in place to refund employer over-contributions.

In 2003, the annual maximum EI premium contribution for employees and employers was set at $819 and $1,146.60 respectively. If employee EI premium payments exceed the maximum contribution limit, employees are refunded the difference when they file their annual income tax returns. Over-payment by an employee typically occurs when two or more employers employ an individual in the same year.

CCA would also like to point out the inequitable treatment afforded to Associated Companies under the current EI rate-setting system. Given the nature of the construction industry, it is not uncommon for a construction employer to operate a group of associated companies. It is also common for the same employee to be engaged by more than one of these associated companies over the course of a year. This group of associated companies is treated as a single entity for tax measures such as the Small Business Deduction. They are treated, however, as different employers for the purposes of the EI Act. As a result, especially since the introduction of the accelerated payment system, employers are finding themselves paying more than the maximum levels with no means for a refund even in situations where the employee is essentially working for the same employer, (i.e. an Associated Company). While the foregoing proposed YBE might alleviate some of that inequity, it is still a significant burden on such companies.

Introduce a mechanism for refunding over-contributions to employers, and treat associated companies as a single employer for the purposes of annual EI premium contribution limits and the proposed refund system.

Recommendation Nº 5 - Contributors Should Have Input

The contributors to the Fund should have a much larger role in the establishment of rates.

Since 2002, the EI premium rate-setting process has been purely a Cabinet/Ministerial function. Prior to 2002, the Canadian Employment Insurance Commission (CEIC) set the rates based upon consultation with employers and employees. The ability of the Commission to influence rates, however, has always been questionable. In effect, the Minister of Finance has always established the rates.

Reinstate the role of and empower the Commission or put in place some alternative body to ensure meaningful input from EI premium payers into the establishment of EI rates. The suggestion to stabilize rates over a long-term (i.e. 10 year) basis would simplify the rate-setting process and require consultation on a less frequent basis.

The contributors to the Fund should have a much larger role in the establishment of rates.

Recommendation Nº 6 - Segregate the EI Fund

The administration of the Employment Insurance Account is a significant activity of the Federal Government. In 2001-02 alone some $19 billion in EI premium contributions were collected and some $15 billion expended on benefits and administration.

The Employment Insurance Account is consolidated with the financial statements of the Government of Canada. As a result, it has a significant impact on the government's overall financial results. For example, the government's overall surplus in 2001-02 of $10 billion would have been $4 billion lower were it not for the surplus in the Employment Insurance Account.

Separate the EI fund from General Revenues. EI contributions should be kept in a stand-alone account and not in the Consolidated Revenue Fund. Surpluses in the Fund should be retained by the Fund or returned to the contributors and not used to balance the Federal Budget.

Conclusion

Reform the rate-setting process for Employment Insurance premiums as follows:

1. Reinstate identical premium rates for employees and employers, i.e. eliminate the employer multiple.

2. Bring EI premiums into line with true EI program costs (plus a reasonable cushion to survive an economic downturn). Move to stabilize rates on a long-term basis (i.e. fix rates for a 10 year period).

3. Introduce a Yearly Basic Exemption (YBE) similar to that which exists for CPP/QPP, (e.g. first $3,500 of insurable earnings exempt).

4. Refund employers for EI over-contributions. Employees are refunded for excess contributions over the annual contribution limit but there is no mechanism in place to refund employer over-contributions.

5. The contributors to the Fund should have a much larger role in the establishment of rates.

6. Segregate the EI fund from General Revenues.

---

1. Auditor General of Canada, Supplementary Information Observations of the Auditor General on the Financial Statements of the Government of Canada for the Year Ended March 31, 2002, Chapter 11, paragraph 11.148, December 2002. [Return]

2. Ibid, paragraph 11.147. [Return]

3. Ibid, paragraph 11.139. [Return]

4. Ibid, paragraph 11.140. [Return]

5. Employment Insurance Act, 1996, c. 23, Section 66. [Return]

6. Supra, Auditor General of Canada, Supplementary Information Observations of the Auditor General on the Financial Statements of the Government of Canada for the Year Ended March 31, 2002, Chapter 11, paragraph 11.143, December 2002. [Return]

7. Beyond Bill C-2, May 2001. [Return]

8. Ibid. [Return]