EI, Self-Insurance or Three-Card Monte?

Monte Solberg, the former Conservative cabinet minister responsible for Employment Insurance, proposed to eliminate the program in a recent Sun Media column:

An alternative would be to self-insure. Employee and employer premiums would accumulate in an account in each worker’s name. Including interest, anyone who managed to stay employed through their lifetime earning even a modest income would stand to collect several hundred thousand dollars at retirement.

The concept of insurance is that pooling premiums from many people provides enough money to compensate only those who suffer losses. It makes no sense to assume that saving up each individual’s premiums could compensate if he or she actually suffers a loss.

I debunked Solberg’s proposal when I was asked about it on The Lang & O’Leary Exchange the week before last. But it’s worth going through the numbers in more detail than was possible on television.

This year, the maximum employee premium is $891 and the maximum employer premium is $1,248, for a total of $2,139 per employee. About 60% of Employment Insurance funds are spent on regular benefits as opposed to parental leaves, training, etc. So, an employee contributing the maximum would deposit $1,283 this year under Solberg’s scheme.

This year’s maximum Employment Insurance benefit is $501 per week. For each year worked, an employee would accumulate enough money to self-insure against two and a half weeks of unemployment.

The average duration of unemployment for a jobless or laid-off Canadian is 20 consecutive weeks. Under Solberg’s scheme, someone would need eight years of continuous employment to self-insure against one average period of unemployment.

In fairness to Solberg, he does suggest, “Maternity and compassionate benefits could be spun off into separate government programs.” But these programs would still need to be funded. The only way to make self-insurance work would be to hike premiums, or raise other taxes to pay for the programs other than regular benefits.

Beyond self-insurance against unemployment, Solberg claims, “Including interest, anyone who managed to stay employed through their lifetime earning even a modest income would stand to collect several hundred thousand dollars at retirement.”

Let’s imagine someone who contributes the maximum every year for 40 years. If his or her earnings and contributions increase by 3% every year, the annual deposit would rise from $1,283 this year to $4,064 four decades from now.

If the money accrued 3% annual interest, the employee would have $162,559 at retirement. That’s nothing to sneeze at, but it’s not “several hundred thousand dollars.”

For argument’s sake, let’s assume that Solberg has a plan to pay for parental leaves, training, etc. as separate programs. In that case, someone contributing the maximum would get $2,139 in their account this year. Using the same assumptions, their retirement nest-egg would be $270,932.

That’s more than a couple hundred thousand dollars, but I am still not sure it qualifies as “several hundred thousand dollars.” In any case, if we are projecting pay increases and compound interest four decades into the future, we should also consider inflation.

The Bank of Canada targets 2% annual inflation. At that rate, $2.16 will have the same purchasing power in forty years as a dollar today. So, that self-insurance fund would be worth $125,156 in today’s dollars.

Extensive political struggle and a constitutional amendment were required to implement Employment Insurance. Canadians should not be conned into giving it up based on false promises of “several hundred thousand dollars” for those fortunate enough to always make at least the maximum insurable earnings and never be unemployed.


  • What about the social costs to society of unemployment. Bottomline, there will be a cost, whether it is in taxes or an insurance premium. So one must factor in the cost to taxpayers of the effects of unemployment and the economic and social costs of not funding those that are unemployed. That would and could mean many things other than a EI payment. Say for example a much more costly construction wage for those seasonal workers that leave the industry due to the fact that their companies do not receive a wage subsidy to keep workers idled in winter months and accept a lower pay. Therefore the costs of construction wages would rise in peak periods as seasonal labour would be employed elsewhere. There is a fluidity and lubricant that EI offers the labour markets that keep other costs lower, that simple conjecture that is propagated by the right fails to quantify.

    How about the social costs of prolonged periods of unemployment and imperfect information in labour markets. These will produce costs in many other dimensions that are not easy to disentangle.

    End result- that simple self- insurance scheme basically will result in tax increases somewhere else. I go back to Polanyi’s double movement and Marx for increasing contridictions- EI was a means to mitigate the effects of both and keep the unemployed from marching on the streets. Given the state of the EI program now, maybe getting rid of it all together is not a bad idea- let the unemployed send a message loud and clear. The right is getting a real social bargain with the current EI, and organizations such as the Fraser institute should do their homework and realize the bargain they are getting in terms of social peace- and shut the hell up before the true beast of social unrest is awakened.

  • As to the “save a bunch by retirement” schtick, I hardly think we need a “program” which consists of helping those are never unemployed in their entire life and who always make enough to contribute the maximum, be better off in retirement. I’m thinking those aren’t the people who need a ton of help. In any case, we have plenty of stuff for those people already. RRSPs, TFSAs, various other tax loopholes.

    A more plausible case for the individual account model would be that while it’s true the broader model is far more efficient in theory, in practice the government has this increasing tendency to collect all the premiums and refuse to pay out benefits in return. If you only have a 1 in 3 chance of getting your money when you’re laid off then an individually-based fund could be only one third as efficient and still be just as good on average from a practical standpoint as long as you’re actually in control of the money. And that’s before we get into all the annoying, time wasting and demeaning stuff you have to do just to get at your insurance payment these days.
    But it would be a lot more effective to keep a social, pooled model of insurance but run it in a way more controlled by the people paying in.

  • I completely agree that we need to improve EI rather than just defend it. However, the status quo is not as bad as “a 1 in 3 chance of getting your money.”

    The two-thirds of unemployed Canadians who are not currently receiving benefits includes people who never paid into EI and people who did receive EI but have exhausted their benefits. As table 6 shows, the eligibility rate is far better than one-third for all but part-time workers.

    It’s also worth noting that EI is now a separate fund, albeit one endowed with very little money by Monte Solberg on the eve of the financial crisis. There should be a better balance between premiums and benefits going forward, with less opportunity for the treasury to siphon out money.

    While the current accessibility, level and duration of EI benefits is inadequate, we should not give short shrift to this crucial social-insurance program.

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