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The Progressive Economics Forum

EI Premiums Come Full Circle

For reasons that escape me, the Globe ran a headline front page story today on what all fiscal policy and Employment Insurance wonks have known to be true for some time.

Under current legislation, and as announced in the 2009 Budget, the EI premium rate set by a supposedly autonomous but tightly constrained new body will rise by 15 cents per $100 of insured earnings for workers, and by 21 cents per $100 of earnings for employers in January. This is the maximum increase allowed, and the maximum increase is required since premiums must rise to balance revenues and expenditures if the fund has no surplus. Premiums must rise, that is, unless the government decides to exercise its right to unilaterally set the premium rate, which it does not intend to do.

This is a new chapter in an old story which brings us full circle.

Once again, the federal government will be deliberately running annual EI account surpluses to reduce the public debt. Minister Flaherty is taking a rather big play out of Paul Martin’s book.

Over the decade from the mid 1990s, the Liberals slashed EI benefits and only slowly reduced premiums, resulting in the gradual accumulation of a $57 Billion surplus in the EI account. This was a semi fictitious account which is fully integrated with the consolidated revenue fund, meaning that the annual EI surplus effectively reduced federal government deficits and debt.

Using EI surpluses in this way was vigorously opposed by workers (who wanted better benefits) and employers (who wanted lower premiums.)

Enter Canada’s New Government. It will never happen again, they said. So they established a separate EI Fund run by a crown corporation to balance the Fund on an annual basis and to ensure that any surpluses were not diverted to government coffers.

They did, however, neglect one important thing, namely to endow the “new” EI Fund (still integrated with the federal government accounts) with the “old” EI surplus. Instead, it got a semi fictitious intital credit of $2 Billion – well under the $15 Billion which it has been calculated by the Chief Actuary would be needed to deal with a serious recession.

Shit happens, and the unanticipated Great Recession hit us, and the federal government’s finances, big time.  The “new” Fund has effectively begun its life with a very large deficit, expected to be as high as $10 Billion, accumulated over the recession. This deficit now sets the stage for a series of annual premium increases intended to produce annual EI account surpluses moving forward. These surpluses will reduce the EI Fund deficit, which effectively means the federal government deficit and debt since the accounts are still integrated. 

In short, the Conservative government will give us exactly what we got under the previous government – annual EI account surpluses which will be used to pay down government debt rather than to support workers and communities. 

(Afficianados of subtle differences will note that the new model precludes sending a possible future surplus in the new EI account over to the government books, which is a theoretical possibility a few years out and modestly to the credit of the Conservatives. By then I shall have forgotten, and a new government may simply choose to  revisit EI Fund governance once again.)   
 
This is perverse policy in macro policy terms.  At a minimum, the premium rate should not be raised so long as the economic recovery is still very slow and unemployment remains at or near 8%. The fragility of the economic outlook for 2011 was emphasized as recently as yesterday by the Governor of the Bank of Canada. There is a very real risk that already very slow new hiring by employers could grind to a halt if premiums increase, especially when employers can see full well that their premiums will be rising over several years moving forward.
 
As an alternative, the Canadian Labour Congress has said that the Government of Canada Consolidated Revenue Fund could and should absorb all of the additional EI program costs incurred during the extraordinary circumstances of the recession, not just the modest cost of the few special measures such as the five extra weeks which were introduced on a temporary basis.

Such a move would let us maintain the current EI premium rate, which approximately balances revenues and costs at an unemployment rate of between 6% and 7%. 
 
Canadians understand the critical importance of the EI program, especially in tough economic times. Why should the the extra cost of the program in the recession not be charged to the emergency stimulus program which helped us get through the recession?

Enjoy and share:

Comments

Comment from Kelsey Kirkland
Time: September 9, 2010, 7:02 pm

This chicanery is the proof Stephen Harper did not set up a truly Arms length agency for managing the EI fund and setting the EI premiums.

What do the nominated directors of Canada Employment Insurance Financing Board have in the way of explanation about this to hard working Canadians? If these directors were paying minimal attention to global economic situation in 2009, they would have foreseen the coming hardship or at best a fragile long dragged recovery.

The fact won’t be lost on Canadians that rising premiums particularly in this environment are advantage to established big business’, straining smaller firms which invariably fail to thrive. Indeed, consolidating business in the hands of fewer and fewer. What I would like to know is who is Celebrating already.

http://www.marketwire.com/press-release/Minister-Finley-Announces-Board-Directors-Canada-Employment-Insurance-Financing-Board-1009541.htm

Comment from Paul Tulloch
Time: September 9, 2010, 8:46 pm

Why can we not get a government that actually treats insurance system in the way it was designed. If the liberal s would have at least left say 50% of the funds from the surpluses ran, in the “good times” we would have been able to help many of the targeted sectors that have been hardest hit in a much more encompassing solution oriented means.
Now the tories, as you mention are taking us down the same path. When the patient is sick, is not the time to be messing with the revenue flows.

Not sure if the tories have had a look at trade data lately- but I will say, it was a bit scary seeing the US Export numbers shrinking again and the trade balances in deficit space quite a bit of time.

Putting that together with some fairly loud signals from south of the border and I would say we are starting to see some real evidence that the recovery winds are starting to change for the bad.

Fast frozen solutions are hardly a way to make our way forward, more shovel ready projects are not what we need. We have got to start a comprehensive program for economic recovery, especially for the sectors that have been deeply affected.

Unfortunately it will probably take a change in parliament to get some serious action on the sustainable recovery front. I wonder if the Liberals or NDP will have the same signage clauses built into their action plans. I think the tories spent more time thinking about how to market the economic recovery plan, than actually planning the plan. Phrackkkkkkkk.

Comment from Paul Tulloch
Time: September 9, 2010, 9:11 pm

Kind of sad, I was just looking at Consumer bankruptcies in Canada for the last few months- kind of a portrait since the recession hit. To me it is the personal bankruptcies that, outside of employment data, do tell a tale of the strife that is on main street. Well they are climbing at rates that in areas that have been hardest hit by the recession. Windsor, Oshawa and many other cites, have seen rates shoot up in the last year to heights that they have never been.

It is quite obvious that the EI funds allocated are not enough in these areas when you see bankruptcy rates climb to those level. That would be a good paper to dive into- who is up for it?

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