Take the politics out of Employment Insurance

Arthur Sweetman

In the midst of the recession last year, the federal government decided to ignore the spirit of its own legislation (enacted only a year before) and froze the premiums that workers and employers pay to fund the Employment Insurance (EI) program.

This was the right call. Increasing EI premiums -- as was legislatively required -- would have hurt the national economy. But cutting premiums as part of a stimulus package likewise was unnecessary at that time.

The government's actions, though correct, point to a larger problem with how EI premiums are set. Right now, despite the creation of the new Canada Employment Insurance Financing Board (CEIFB), the setting of premium rates is still vulnerable to political and partisan influence. Canada should remove politicians and partisan politics from the rate-setting process entirely and grant the CEIFB the same independence to set EI premiums as the Bank of Canada enjoys with respect to interest rates.

In the previous three recessions, the government raised premiums at the exact worst time, exacerbating the downturns by taking more money out of the hands of employers and workers. Then the government overstimulated two of the economic booms that followed by lowering premiums.

Although much broader in scope and larger in scale, the governance structure of the Bank of Canada is a good model for the CEIFB. Both face the common need to adjust policy in a dynamic (business cycle) context to stabilize the economy and promote growth. History demonstrated that politicians simply did not have the discipline to manage interest rates properly. Thus, central banks across the world, the Bank of Canada included, were made independent. Decisions of the CEIFB should similarly be principles-based and arms-length from government.

Other changes are also necessary, The CEIFB is mandated to balance the EI books on an annual basis, although it adjusts premiums slowly since there are also mandated limits on the size of changes. This too should be removed. Again, the Bank of Canada's approach is instructive.

The Bank of Canada sets interest rates in response to the business cycle. When the economy slows, interest rates typically go down to help stimulate spending and growth. When the economy grows at a rate that creates inflationary pressures, interest rates typically go up to slow spending and slow growth. Imposing arbitrary requirements on the Bank of Canada's interest-rate policy could have disastrous implications for our economy.

The CEIFB should similarly set the rate for EI premiums in response to the business cycle. The current requirement to target balancing the books on an annual basis, even if actual adjustment is slow, means that premiums have to go up during both the recession and the weak recovery that follows in order to pay the recession-induced increase in benefits and debt in the EI Account (currently over $10 billion). Premiums also likely go down in booms.

There is an "escape clause" to this rules-based approach, but it requires a political decision. It worked this time --it was a politically popular decision to freeze premiums--but not all decisions are so popular. Political intervention should not be necessary -- and a longer view of history tells us that they cannot always be counted on.

Whether EI is treated as a source of general revenue is an important issue about which there has been less than transparent and open discussion. In the 1990s, the federal government started to build up the EI Account's reserves in anticipation of the next recession. But they went further than initially announced and the result was an enormous surplus. Although the Chief Actuary indicated that about $15 billion is required for a serious recession, the notional surplus peaked in 2008/09 at about $57 billion.

Predictably -- and, some could argue, with good reason -- politicians used this huge pool of money as a source of general revenue and not to fund EI benefits during the current recession as promised. In 2010, with a stroke of the legislative pen, the $57-billion EI surplus was formally reduced to $2-billion. Meanwhile, $55-billion went into general revenues and the EI Account quickly went into debt as the recession started.

Canada has taken some important steps. The government has put EI premiums into a separate account to (once again try to) segregate these funds from general revenue. And the government made the right calls during this recession. But there is more to do to complete the process. Like the Bank of Canada, the CEIFB needs real independence and a clear legislative mandate to moderate the business cycle--rather than exacerbate it.

This piece originally appeared in the National Post.