The government has announced in the Budget that it is creating a new, independent Crown Corporation, the Canada Employment Insurance Financing Board (CEIFB) to manage a separate EI bank account, and to set premiums from 2009 on. This responds to employer concerns re paying EI premiums which are “too high” as opposed to worker concerns over access to and the level of benefits. That said, both employers and labour strenuously opposed the accumulation of a staggeringly high EI surplus which was used to pay down public debt, mainly as part of the Martin/Chretien anti deficit/debt crusade. The Liberals slashed benefits, but only slowly reduced premiums.
From 2009 on, EI premiums will be set as now – to balance revenues and expenditures for the coming year, with a maximum change in the EI premium of 15 cents. The big change is that, moving forward, any EI account surpluses could be used to reduce premiums. In other words, if there was a surplus in 2009, it could be used to cut 2010 premiums, or to add to the reserve fund. If there was a series of surpluses, EI premiums would be cut.
Responsibility for setting EI program parameters will remain with the Government of Canada (HRSDC), as it should. The Government has also clearly stated that the Consolidated Revenue Fund remains avaiable to “backstop” legislated EI benefits in the event of a recession which resulted in a deficit in the new EI Account.
The CEIFB will begin with a cash reserve of $2 Billion. However, this has not been booked as an expenditure in the Budget. This is apparently because the new account will – like the old EI Account – still be incorporated into the overall Government of Canada Accounts.
Officials say that the “old” EI Account will remain on the books, and that the Government of Canada will continue to ‘backstop’ the cost of EI benefits if needed.
It should be noted that the new $2 Billion reserve is not only hugely less than the accumulated EI Fund surplus of $54 Billion as of the end of 2006-07. It is also much less than the $10 – $15 Billion which the Chief Actuary has estimated is needed to balance the EI account in the event of a serious recession. It remains to be seen if the “new” account will have to build a significant surplus to back-stop the fund in the event of a recession.
We have no information as yet on the governance of the CEIFB but officials say that EI Commissioners will be consulted. Also, EI Commissioners will continue to perform their current role, minus only the premium-setting function.
More details may be in the Budget Implementation Bill which will be introduced (and passed) quite quickly.
Key Questions and Concerns.
What happened to the $54 Billion surplus? This was initially run-up in the name of building up a “rainy day” fund to finance EI benefitswhile avoiding EI premium increases in a recession.
Who will run the new Fund?
What will be the parameters for the new Fund? Will it be expected to build up a new surplus. How and in what way will it be able to draw on the promised $2 Billion.
Ministers of Finance have recently taken the position that the EI Fund is an accounting fiction since it has (since 1986) been completely integrated with the Consolidated Revenue Fund. However, the government continues to publish a separate EI account as part of the public accounts, complete with annual interest paid on the accumulated surplus. Until the late 1990s, the surplus was justified on the grounds that it was a “rainy day” fund to back-stop the EI program and avoild premium increases in the event of a recession.
The legality of the diversion of surplus EI premium revenues to general government purposes has been upheld by the Courts to date. However, the issue is now before the Supreme Court of Canada. Earlier court rulings suggested that the EI reserve continues to be available for EI purposes and is not a mere bookkeeping fiction.
Regardless of pure legalities, diversion of EI premium revenue to non EI purposes has been criticized as a breach of trust by representative organizations of workers and employers, and by all parties through the 2005 report of the House of Commons Standing Committee on Human Resources, Skills Development and Social Development and the Status of Persons with Disabilities (HUMA), “Restoring Financial Governance and Accessibility in the Employment Insurance Program.”
The accumulation of an EI surplus far in excess of the $10 – $15 Billion estimated amount to balance program revenues and expenditures over a business cycle has also been strongly criticized by the former Chief Actuary of the EI program, by the Auditor-General of Canada, and by the Canadian Institute of Actuaries.
For the past three years, EI premiums have been set through a new “forward-looking” process, ostensibly by the EI Commission. By legislation, the accumulated surplus is disregarded for purposes of setting a premium rate, and the Commission is directed to set a rate which precisely balances revenues and benefits (plus administration costs) over the coming year, based upon economic forecasts, EI program parameters as determined by the government, and the estimated level of revenues, expenditures and resulting balances calculated by the Chief Actuary. There is a legislated ceiling of 0.15% on premium increases, and the government can set the premium in lieu of that recommended by the Commission if it so chooses, subject to the maximum.
It is a source of concern that, under the new process, the premium rate could not be significantly increased during a period of recession and high unemployment, notwithstanding the accumulated surplus. In both the early 1980s and early 1990s, the national unemployment rate rose very sharply (from 7.5% before the recession to over 11% in 1982-85 and 1991-93). Studies commissioned by the government prior to legislated changes to the program in the mid-1990s found that EI (then UI) had significantly moderated these recessions through increases in benefits not accompanied by premium increases.
To be sure, the government could still freeze premiums in the event of a recession, but it would not be bound to draw on the accumulated surplus, and might choose not to do so.
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