What Happened to the $54 Billion EI Surplus?

CLC Statement on the Canada Employment Insurance Financing Board

The 2008 Budget Implementation Bill (C-50) creates – through Part 7, the Canada Employment Insurance Financing Board Act – a new, independent crown corporation, the Canada Employment Insurance Financing Board (CEIFB).

The key functions of the new corporation and Board are to manage a separate Employment Insurance (EI) reserve fund, and to set EI premiums from the year 2009. However, the deeply flawed current premium-setting process is essentially unchanged from the status quo.

The key failure of Bill C-50 is that it neglects to make all or even any part of the huge accumulated EI surplus of $54 Billion available to improve EI benefits as sought by the labour movement, social development and anti-poverty organizations and many provinces.

For us, the key issue which has been completely avoided in this Bill is improved worker access to regular and other benefits. The key reforms to the EI program which we have advocated is a reduction in the number of qualifying hours to 360 in all regions, a longer duration of up to 50 weeks of regular benefits and an increase to at least 60% in the percentage of insured earnings replaced by EI benefits based on the best 12 weeks of earnings. These improvements would better the lives of working families, with particular benefit to working women, and would be easily affordable if even a small part of the accumulated EI surplus had been made available to finance program improvements.

With respect to EI financing issues, Ministers of Finance have recently taken the position that the EI Fund is an accounting fiction since it has (since 1986) been completely integrated with the Consolidated Revenue Fund. However, as has recently been noted and detailed by the Canadian Institute of Actuaries, the government continues to maintain and publish details of a separate Employment Insurance Account as part of the Public Accounts, complete with annual interest paid on the accumulated surplus. Until the late 1990s, the surplus was justified by the government on the grounds that it was a “rainy day” fund needed to backstop the EI program and to avoid premium increases in the event of a recession.

The legality of the diversion of surplus EI premium revenues to general government purposes from the mid 1990s through to 2007 will soon be at issue before the Supreme Court of Canada. Earlier court rulings suggested that the EI reserve continues to be available for EI purposes and is not a mere bookkeeping fiction.

Regardless of pure legalities, diversion of EI premium revenues to non EI purposes has been criticized as a breach of trust by representative organizations of workers and employers and by all parties through the 2005 report of the House of Commons Standing Committee on Human Resources, Skills Development and Social Development and the Status of Persons with Disabilities (HUMA), “Restoring Financial Governance and Accessibility in the Employment Insurance Program”.

Both employers and labour strenuously opposed the accumulation of a staggeringly high EI surplus which was used to pay down public debt, mainly as part of the anti-deficit/debt crusade of the previous Liberal government. That government deeply slashed EI benefits from the mid-1990s, but only slowly reduced premiums, even as the proportion of unemployed eligible to collect benefits plummeted and as the maximum EI benefit was frozen for a decade.

The accumulation of an EI surplus far in excess of the $10 – $15 Billion estimated amount to balance program revenues and expenditures over a business cycle has also been strongly criticized by the former Chief Actuary of the EI program, by the Auditor-General of Canada and by the Canadian Institute of Actuaries.

Bill C-50 does not eliminate the EI Account and the accumulated EI surplus. But, in creating a new separate EI reserve account, it is clearly intended to relegate the accumulated EI Account surplus to history. Section 127 of the Bill explicitly prohibits the CEIFB from taking into account in premium-setting the balance in the Employment Insurance Account.

The CLC calls on Parliament to amend Bill C-50 to explicitly state that the accumulated surplus in the Employment Insurance Account remains available to fund EI benefits in the event that premium revenues fall short of program costs in any year moving forward, as well as to improve program benefits.

An assurance that the federal government would ‘backstop’ the EI program in the event of a serious recession has already been given by the Minister of Finance, but needs to be made explicit in legislation.

Bill C-50 does not change in any significant way the current premium-setting process, which ignores the accumulated EI surplus and is intended to balance EI premiums and EI expenditures on a purely forward-looking basis.

For the past three years, EI premiums have been set through a new “forward-looking” process, ostensibly by the EI Commission but in reality by the government. By legislation, the accumulated surplus is disregarded for purposes of setting a premium rate and the Commission is directed to set a rate which precisely balances revenues and benefits (plus administration costs) over the coming year, based upon economic forecasts, EI program parameters as determined by the government and the estimated level of revenues, expenditures and resulting balances as calculated by the Chief Actuary. There is a legislated ceiling on premium increases and the government can set the premium in lieu of that recommended by the Commission if it so chooses, subject to the maximum.

As with the current premium-setting process, premium changes by the CEIFB will be limited to 15% in any given year, meaning that premiums would still inappropriately rise by 15% in the event of a downturn. As with the current premium-setting process, the government can set a different premium if it so decides.

It is a source of concern that, under the new process, the premium rate could be significantly increased during a period of recession and high unemployment, notwithstanding the huge accumulated surplus ostensibly collected to create a “rainy-day” fund. In both the early 1980s and early 1990s, the national unemployment rate rose very sharply from 7.5% before the recession to more than 11% in 1982-85 and 1991-93. Studies commissioned by the government prior to legislated changes to the program in the mid-1990s found that EI (then UI) had significantly moderated these recessions through increases in benefits not accompanied by premium increases.

The only major change moving forward if Bill C-50 is passed is that any FUTURE surpluses of EI revenues over program costs will remain with the separate reserve account to be run by the new Board, rather than added to the EI Account as in the past. This new reserve account will, we are told, be independently run and will independently accumulate investment returns on an initial endowment of $2 Billion. However, the new reserve account, like the old EI account, remains integrated with the accounts of the federal government and the government will set the size of the reserve to be maintained.

The Board will begin with a very modest endowment of $2 Billion. (This has not been booked as an expenditure item in the 2008-09 Budget, apparently on the grounds that it simply represents an internal transfer within government accounts.) This amount is not only grotesquely short of the accumulated $54 Billion surplus in the EI Account, it also falls well short of the $10-$15 Billion which the Chief Actuary has estimated would be needed to stabilize EI premiums in the event of a serious economic downturn.

The amount of the reserve to be established by the new Board will not be set by the Board, but rather by the government through regulation. The amount will, apparently, basically be that needed to finance the program while avoiding a premium change of more than 15% (the current maximum/minimum increase/decrease). The aim is to ensure a balance between premiums and payments over time through a system of interim and then final reconciliation payments. There is a requirement to lower premiums if the reserve grows above the mandated level.

This extremely limited initiative does nothing to address the issue of inadequate EI benefits and does nothing to direct the huge EI surplus to the purposes for which it was collected. Rather it responds to employer concerns about paying EI premiums which are “too high” and the fact that surpluses have continued to accumulate even under the new “forward-looking” premium-setting mechanism.

It remains the view of the CLC that premiums should not be increased at all in the event of an economic downturn, but rather than program expenditures should be funded in a downturn from the accumulated surplus.
In the view of the CLC, responsibility for setting EI program parameters (ie eligibility for benefits and the level and duration of benefits) and all aspects relating to delivery of the program should remain with the Government of Canada, through the Minister of Human Resources and Social Development. The government says there is no intent to shift control of the program or its delivery to the new Board and Section 5.2 would seem to limit the new Board from getting into policy, program and delivery issues outside of its mandate.

However, we call for an amendment to explicitly state that the new Board shall not undertake any analysis or make recommendations with respect to EI program parameters, with respect to delivery of the program and with respect to the current division of the EI premium between employers and workers.

The new Board will have seven members and a rather elaborate system of corporate governance which is dictated by its establishment under the legal form of a crown corporation. It is unclear how many permanent staff will be required, but the perhaps substantial additional costs will be borne from EI revenues and any investment returns from the reserve account. The Chief Actuary will cease to be an employee of the Government of Canada and other staff may be transferred.

The CLC has concerns that ministerial accountability for the financing of the EI program could be undermined by the new Board, even though the government will continue to play a key role in premium-setting. We urge Parliament to ensure that there are minimal additional costs and that full ministerial accountability is maintained.