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To reform Employment Insurance, Ottawa must change the way it is financed
Because premiums are recalculated annually based on updated economic and employment projections, the account’s return to balance is continually pushed seven years into the future. (Pexels photo)
After two years of cross-country consultations, the federal government has a lengthy wish list of reforms to the employment insurance (EI) program to consider. Depending on which options it selects, annual costs could rise between $5 billion and $15 billion on top of the roughly $29 billion average projected between 2023 and 2029. Without changing the approach to financing, businesses and workers will face significant increases in premiums, and revenues will fall short of costs for decades to come, jeopardizing the self-financing aspect of the program.
In a recent report, the Institute for Research on Public Policy analyzed options and considered expert, union and business perspectives for reforming the approach to EI financing. Based on this analysis, we propose three key changes: changing the way premiums are calculated, covering the costs of pandemic-related extended benefits, and increasing incentives for worker training.
Adjusting the way EI premiums are calculated
EI premiums are deducted from employee paycheques and accompanied by an employer contribution per employee that is 1.4 times higher. Premiums are set with the aim of bringing the EI account into balance within a seven-year timeframe.
However, the calculation assumes premium rates will remain in place for the full seven-year period. Because premiums are recalculated annually based on updated economic and employment projections, the account’s return to balance is continually pushed seven years into the future.
The 2023 EI premium rate for workers is currently set at $1.63 per $100 of insurable earnings ($2.28 for employers). This is the maximum increase permitted by the legislated five-cent limit on annual rate changes. That means the 2023 EI premium rate is less than the rate required to balance the account within seven years, which would be $1.74 per $100 of insurable earnings for workers.
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The government could shift to a 10-year timeframe for its break-even rate, thus reducing premium increases. The difference in certainty on economic projections between seven and 10 years is minimal and the change would have a limited impact on the time it takes for the account to return to balance, given annual recalculations and the five-cent limit on premium increases.
To accelerate the account’s return to balance, the government could instead prevent premium decreases while the EI account remains in deficit. This would also have the benefit of stabilizing premiums that have tended to rise and fall each year. The combined result of the shift to a 10-year break-even rate and a limit on premium-rate decreases would mean a lower peak in premium rates and a longer period where premiums do not change.
Pandemic-related extended benefits
The government could also cover the costs of pandemic-related extended benefits, which account for around $24 billion of the estimated $27 billion in EI account debt at the end of 2022. This would allow EI reforms to be introduced with a clean slate, reducing the otherwise-necessary increase in premiums over the coming decade. For example, if the government had introduced this change in 2021, it would have reduced 2022 employee EI premiums for workers by 16 cents. Introducing it for 2023, while maintaining the five-cent cap on premium increases, could help businesses get through the anticipated economic downturn before facing rising costs.
The government could also establish a longer-term framework whereby it agrees to contribute to the EI account during severe recessions, given the important role EI plays in stabilizing the economy for all Canadians. A national unemployment rate threshold, set somewhere between seven and eight per cent, could trigger federal contributions to the EI account.
Increasing incentives for worker training
The government has a number of tools, within and outside the EI program, to increase incentives for businesses to provide training and for workers to take training. Workers with less education and fewer skills are more vulnerable to unemployment. Shifts to remote work and the low-carbon transition may also lead to new types of workers relying on EI, some in regions that have historically had low unemployment. The EI program can play a role in helping to build workforce resilience and ultimately in reducing program costs by supporting upskilling.
The premium reduction program could be used to provide incentives for small- and medium-sized businesses to provide training. The skills boost program could be extended from solely long-tenured workers to allow low-skilled workers without that length of experience to receive regular EI benefits while in full-time training. The government could also consider allowing some people to qualify for EI after quitting their jobs to pursue training or education.
Prioritizing EI reforms
While the three adjustments proposed above will help make EI reform easier, the government will still need to prioritize reforms if it wants to limit the long-term burden on premiums and have a reasonable chance of bringing the EI account back into balance.
One of the most important reforms, and the easiest to implement, is shifting to a uniform eligibility requirement of 420 hours of work in the last year, compared to the current approach that varies from 420 to 700 hours, depending on regional unemployment rates. The government made this change temporarily during the pandemic but ended it in September. It would increase the number of unemployed workers covered by EI and would support low-paid, part-time workers who live in larger cities and who were previously ineligible.
The government could also increase the income replacement rate to 60 from 55 per cent, providing more benefits to those relying on EI. This change would help the lowest-income workers, as well as those earning above the maximum insurable amount ($60,300 in 2022) who receive far less than 55 per cent of their income under the current system.
Bolder reforms, such as creating an EI-like program for the self-employed or increasing maximum insurable earnings, could be introduced in 2025 or later given that they face significant implementation challenges. They are no less important than the other proposed changes above but would benefit from additional analysis to address potential unintended consequences.
The figure above shows the estimated impact of our proposed near-term changes to the EI program and financing on both premium rates and the cumulative balance in the EI account. It uses economic and employment projections from the 2023 EI actuarial report. Premium rates would increase by the maximum five cents per year until 2028 but then hold steady until the EI account balances in the late 2030s before dropping. A scenario with a 2023 recession, based on projections provided in the 2022 Fall Economic Statement, is illustrated in the figure for reference. Any other recessions or deviations from projections over the time period would influence the results.
Overall, our proposed package would go a long way to addressing the most egregious problems with the program while limiting the burden on businesses, workers and taxpayers.
This article first appeared on Policy Options and is republished here under a Creative Commons license.
