Expected EI premium hikes court controversy

Canada’s employment insurance (EI) system may be at a crossroads. Several years ago, many thought the premiums employers and employees were required to pay into the system were higher than necessary to maintain it. The money taken in from premiums were greater than the cost of benefits and, as a result, the EI fund grew a surplus of $57 billion.

However, in a relatively short time, things completely changed for EI. The $57 billion surplus went into the federal government’s coffers and was used to pay general expenses. In response to the outcry from business and labour groups, a separate fund was created into which money collected from premiums would go, along with a board to oversee it. This money would stay separate from other government revenues and the EI system would be self-funding. However, the previous surplus was gone and the revamped fund started with $2 billion in 2008. In addition, rules were established that if the fund dropped below $2 billion, annual increases to premiums would be automatically set at the maximums — $0.15 per $100 of earnings for employees and $0.21 for employers — until the fund hit $2 billion.

The tidal wave of the recession soon hit and EI was swamped with an increase in people requiring EI benefits as job losses mounted. As part of a stimulus package, the feds implemented a two-year freeze of EI premiums at $1.73 per $100 of earnings, with a maximum payment of $747.36 in 2010, for employees and $2.42 for employers, with a maximum of $1,046.30 in 2010, making it difficult to recoup the extra money that was flowing out. As a result, the EI fund will be in the hole to the tune of $10.7 billion in 2011, according to the parliamentary budget office’s estimates. This will trigger the maximum premium increase each year until 2015, which would put employee premiums at $2.48 and employer premiums at $3.47 per $100 of earnings in that year. The increases would mean employers would pay $312 more per employee, while employees would pay about $223 more.

EI fund left unprepared for recession

However, the circumstances the EI fund finds itself in and the resulting premium increase over the next few years could have been avoided, says Corinne Pohlmann, vice-president, national affairs for the Canadian Federation of Independent Business. The removal of the $57 billion surplus before the separate EI fund and its governing board were established left the system exposed to the effects of the recession, says Pohlmann.

“We strongly believe employers and employees overpaid into the system for years, resulting in surpluses up until 2008,” she says, adding “we wouldn’t be facing premium hikes” if the money was kept in the system.

The problem with maximum premium hikes is the rules specify the premiums can only decrease by the same maximums each year, meaning once the EI fund passes $2 billion, it will be a few more years before premiums get back to even their current levels. This means employers and employees will continue to overpay into the system for some time and the surplus will grow unnecessarily large again. And this will have a negative effect on the economy, says Pohlmann.

Paying back the $57 billion surplus would be more effective than increasing premiums, says Sylvain Schepagne, a senior economist with the Canadian Labour Congress (CLC). The rules governing the maximum premium increase and the $2 billion threshold, as well as the two-year premium freeze, haven’t taken into account the long-term progress of the system as self-sustaining.

“The program is running on its own, but it’s missing the money it previously gained,” says Schepagne. “It’s a false deficit that doesn’t take the full picture into consideration.”

Premium increases could cost jobs, hold down wages: CFIB

The CFIB issued a report in February that projected EI premiums and revenues until 2020 and estimated the increased premiums would add 0.6 per cent to payroll costs, which could cost about 170,000 jobs and hold down wages by 1.5 per cent long-term.

“This is a tax increase. The day it becomes optional to pay EI, it won’t be a tax,” says Pohlmann. “Our members say payroll taxes have the greatest impact on the growth of business.”

Are increased premiums the only way for the EI system to get out of the recessionary hole it’s fallen into? There are other options, says the CFIB.

The organization is pushing for a minimization of the premium increase to soften the blow, says Pohlmann. While she acknowledges this would increase the EI fund’s deficit “a little bit” initially, the decreased hit on businesses would have long-term benefits and the deficit would eventually return to surplus before too long. The CFIB recommends measures such as an EI tax credit for training and hiring initiatives, similar to the New Hires Program the government had in the 1990s, and a break on premium increases for employers that increase their payroll.

“One debate we want to have is where is the happy medium? It’s about political priorities,” says Pohlmann.

The CLC also thinks there needs to be more attention paid to encouraging job creation and limiting the financial burden increased premiums will bring. The current emphasis on balancing the books right away with increased premiums will negatively affect wages and benefits packages because of the increased payroll burden, says Schepagne.

“The overall goal is to create good jobs in Canada to release the pressure on the EI system,” he says. “What is more important: To balance the EI fund as soon as possible or to do as much as possible so workers can have jobs?”

CFIB’s projected EI premium rates

The Canadian Federation of Independent Business (CFIB) released a report in February written by Ted Mallett, the organization’s vice-president of research and chief economist, that projected employment insurance (EI) premium rates, surpluses and costs over the next 10 years (see story on page 1). With the increase in demand during the recession and the two-year freezing of premium rates, the EI fund will go into the red by the end of 2010. This will trigger automatic maximum increases in premiums ($0.15 for employees, $0.21 for employers) every year until the EI fund achieves a surplus of $2 billion. Once that happens (projected in 2015), premiums can only decrease by the same maximum, so rates won’t return to current levels for an additional four years.

EI premiums per $100 of maximum insurable earnings