The complexity and perverse incentives of Canada’s Employment Insurance (EI) program are an eyesore on the nation’s economy. Rather than open the economy up to modernity, however, reforms approved by the Senate on March 17 (Bill C-24) increase EI generosity and accentuate moral hazards.
The latest changes go beyond more weeks and lower thresholds for contributions. They include malevolent provisions such as ineligibility for people stuck in mandatory quarantines. There are exceptions to this exception, of course, which feed fraud and the enforcement bureaucracy.
At times like these, one wonders what employment insurance would look like if it served customers—those who pay in—rather than bureaucrats.
The reality behind the façade of the prevailing reform is that Canada cannot provide income security to everyone. Refurbishing the EI system again and again without changing the paradigm is window dressing. Especially as the fiscal crisis deepens, the federal government needs to revamp the arcane employment-insurance regime once and for all.
The Cost of Mitigating Economic Impact
Bill C-24 expanded access to EI benefits by lowering requirements and increasing the EI weekly benefit from $400 to $500. According to the parliamentary budget office (PBO), expanded eligibility and generosity will cost the government $13.5 billion over the next two years.
Sustainable, long-term solutions do not appear to be part of the federal government’s toolbox. Even the International Monetary Fund (IMF) has recommended the Canadian government reduce its spending.
Until December 2020, Canada spent around $226 billion on employment benefits, mortgage deferrals, retirement accounts, wage subsidies and business loans. As the IMF indicated in its report, all this will lead to larger deficits.
Indeed, the EI system will run operating deficits for years to come and, according to the Fraser Institute, the premium rates that employers and employees have to contribute will reach 1.79 per cent in 2025.
An Outdated Model
Canada created the EI system in 1937 to provide income security for Canadian workers who had lost their jobs involuntarily. The expanded EI system now reaches far beyond the original goal. Special-benefits claims, such as sick and parental leaves, now make up over one-third of all EI costs, averaging $5.8 billion annually.
In the 1990s, the federal government tackled far-reaching reforms to keep the EI program sustainable. The COVID-19 pandemic calls for similar measures. Not only is the financial future in jeopardy, but the model no longer serves a modern economy.
Jobs nowadays escape the usual full-time and part-time EI boxes. Jobs in the gig economy through digital platforms are becoming increasingly common. These new labour arrangements give workers control over days and hours worked. New risks are not so much joblessness but ups and downs in the demand for services and difficulty recording insurable work hours.
As it currently stands, Canada’s EI will receive fewer contributions from gig jobs with increasing claims from traditional setups. Moral hazard will rear its ugly head, as nominally out-of-work Canadians can claim EI benefits but continue performing gig jobs.
Employment Insurance in the 21st Century
A new EI system should focus on providing revenue continuity only when workers lose all their income sources, while encouraging them to return to the labour market as soon as possible through flexible work arrangements.
The Fraser Institute’s recent reform proposal strikes the right balance between financial stability and the evolving labour market. It suggests adopting mandatory unemployment insurance savings accounts (UISAs) owned by contributors.
“The funds accumulated through payroll taxes and deposited in individual savings accounts are invested in a diversified portfolio with interest and capital gains reinvested,” the report explains. Wealth-management firms can take care of such accounts.
Even if workers withdraw these funds during unemployment, they will want to return to work as soon as possible. Any positive balance in UISAs goes to retirement income, which is an incentive to seek formal jobs, report about gig ones and keep contributing to the accounts.
With this system, all other benefits can be eliminated. Nevertheless, if workers own their UISAs, it is only fair they get to use part of their funds during voluntary work leaves. The EI substitute could also contemplate an insurance program for gig jobs, perhaps on a voluntary basis.
The pandemic accelerated existing trends towards a more digital economy. If Canada wants to remain a leading nation that attracts talent and offers cost-effective protections for workers, it will step up to the challenge of reimagining the EI system.
Paz Gómez is a research associate with the Frontier Centre for Public Policy.
Photo by Tim van der Kuip on Unsplash.
