Social Policy in Ontario

Financing Employment Insurance Reform: Finding the Right Balance 

Posted on December 16, 2022 in Policy Context

Source: IRPP.org — Authors: IRPP Working Group

IRPP.org – research-studies
December 7, 2022.   IRPP Working Group

TOWARDS EMPLOYMENT INSURANCE REFORM

As Canada heads toward what is likely to be another recession, the country’s Employment Insurance (EI) program seems no more ready to deal with the expected increase in demand for benefits than it was when the pandemic hit in early 2020. The proportion of unemployed Canadians able to collect EI has fallen from 80 percent in the 1980s to 40 percent, and many of those who do receive EI benefits struggle to make ends meet.

[Read the related IRPP commentary: Building a Package of Compromise Solutions for EI Reform]

During the pandemic, the federal government introduced temporary measures, including the Canada Emergency Response Benefit, to cover self-employed and other Canadians who lost their jobs and didn’t qualify for EI benefits, and to mitigate the effects of the downturn on the Canadian economy.

Signs of a renewed slowdown have started to emerge, and there is a growing consensus among economists that economic growth in Canada and around the world will slow in 2023. It remains unclear how severe the downturn will be. However, there are concerns that the EI program may once again not be up to the task of covering an increase in the number of unemployed Canadians, and political leaders and others have urged the government to implement reforms. The government has indicated that it will announce changes to EI following its two-year consultation process that concluded in the summer of 2022.

At the same time, the federal government is facing pressures to avoid increasing EI premiums as many businesses are still recovering from the pandemic and are likely to face another economic downturn. And while some have called for the federal government to contribute financially to the program to limit premium increases, others have expressed concern about burdening taxpayers and adding to the federal debt.

The government will have some difficult choices to make. The IRPP has hosted a series of workshops and undertaken its own analysis to inform these choices. Our first report, How to Modernize Employment Insurance: Toward a Simpler, More Generous and Responsive Program, focused on EI modernization (IRPP Working Group 2022). This report looks at how to finance modernization costs.

Report highlights:

• According to IRPP estimates, the costs of implementing proposals put forward at an earlier workshop held in 2021 on EI modernization range between $5 billion and $15 billion a year.
• Such an expansion, on top of the existing deficit in the EI account following the pandemic, will require either a substantial increase in EI premiums or significantly greater financial contributions by the federal government.
• With the current approach to premium setting, the EI Operating Account is not projected to return to balance until after 2040. Adding modernization costs, or another recession, would make a return to balance increasingly unlikely, calling into question the self-sustaining aspect of the program.
• The report considers adjustments to three financing levers to cover the near-term costs of program reform and to stabilize the EI account: raising the level of maximum insurable earnings; adjusting the premium rate-setting mechanism; and expanding the role of the federal government in EI financing.
• The analysis highlights the difficult trade-off between the coverage and generosity of the program and premiums paid by workers and businesses, but also highlights a range of options to finance modernization, improve stability in premiums and preserve the long-term sustainability of the EI account.
• In response to a workshop discussion on the importance of incentives for employers and employees to reduce reliance on EI and program expenditures, the report also considers experience-rated premiums, adjustments to the Premium Reduction Program and enhanced support for worker training to build workforce resilience.

Many of the choices considered raise important policy questions about the purpose of the EI program, and who should pay for it. Some see the program as an insurance mechanism for employees who pay into it, arguing that taxpayers (many of whom are not eligible to receive EI benefits) should not be on the hook for financing it. Others argue that it fulfills broader policy objectives that benefit all Canadians, such as stabilizing the economy during recessions, and some taxpayer contribution is warranted.

These views were reflected in discussions among our working group participants, who included academic experts and representatives from business groups and unions. There was little consensus among the participants, and their discussions made it clear that there are no easy solutions to addressing the financing challenges that EI faces. All options will involve trade-offs and compromise.

The challenge for the federal government will be to find a compromise package that does not push too far in any one direction, and that is sustainable for the long term under various economic and labour force conditions.

In a separate commentary, IRPP researchers propose a possible package of compromise solutions for the government to consider.

https://irpp.org/research-studies/financing-employment-insurance-reform-finding-the-right-balance/

Tags: budget, economy, ideology, participation, standard of living, tax

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