A rant about EI premiums

It's her first job. She paid $105 last year in Employment Insurance premiums. But she worked fewer than 910 hours. So she wouldn't be eligible to claim EI, even if she was laid off. It's not fair that she has to pay premiums, but receives no entitlement to benefits in return.

Comments

[Andrew F]

I paid them for years and years as a student. I had the same feeling. IIRC, those under 18 also pay but are ineligible for benefits.

[Stephen]

That happened to me. I worked for years and gave the Feds lots of EI dollars, but because I saw a recession coming so went back to school full-time all I had wasted into EI no longer counted. So after I finished a summer position but couldn't land another job, I figured I'd finally ask for my EI(the very reason it was created for). But I was short the hours needed so got nothing.

It didn't stop there. To really make things worst for me was that two offices were telling me two different things. The BC EI office said I would still get it, but that was over-ruled by the Ontario office (I'm in Alberta). So no EI. I did find a job a month later but I'm no fan of EI/UI or whatever spin name you want to give this tax and pork.

[Frances Woolley]

Andrew F, I don't know about the under 18 rule. Over 65s have to pay also, but are not always eligible for benefits, partly because pension income sometimes counts as earnings, but also because of the hours rule.

[david]

Without being facetious (really), I am a bit surprised that anyone expected Employment Insurance to be fair or even "insurance" for that matter, as opposed to an explicit system of politically influenced transfers. Beyond that, I am wondering whether the minimum hours rule is an attempt to address moral hazard.

[Frances Woolley]

David: "as opposed to an explicit system of politically influenced transfers" - this is why I consider it unfair to transfer funds away from low-income part-time workers.

"an attempt to address moral hazard" If workers who worked too few hours a week to qualify for EI didn't have to pay any premiums, then employers would have an incentive to restrict workers hours to just below the EI threshold. That's why all workers have to pay into EI. Also people have multiple jobs so might not qualify with any one employer but might qualify combining their two or three employers.

But there's no reason why EI premiums couldn't be refunded come income tax time for people with too few hours to qualify - employers have to file records of employment so that information is known. It would be just a matter of linking a few records. Or any EI premiums paid below contribution rate*minimum wage*minimum number of hours to qualify could be refunded.

[Mike Moffatt]

Oddly enough, I'm writing a piece for Economy Lab on a proposal by William Scarth that advocates that there should be an exemption limit for employer-side EI, in the same way there is one for income tax. Perhaps such a limit could be added to employee-side EI as well.

It's always seem wrong to me that people have to pay into an 'insurance fund' that they can't possibly ever collect.

[Chris S]

The insured earnings cap along with the 55% pay out factor also pushes EI to the edge of useless for higher income earners. I know a number of people who have done the calculation, and have discovered that if they were out of work, EI would not be enough to cover their fixed costs - things like a mortgage and car insurance. And yet, these people would in no way consider themselves rich - an estimate of a living income for a family of four in Toronto was $66,000, before gas prices spiked in the last two years. But EI isn't giving you any more than about $21,000.

Is there any such thing as "private employment insurance" that can be used to fill in these gaps?

[Frances Woolley]

Mike, there is a real problem with that kind of proposal if it means that people who work multiple part-time jobs can't qualify for EI benefits, also if it means that employers have an incentive to keep employees just below the eligibility threshold. There is a reason that we have the system we have.

Chris S - on private employment insurance - the credit card companies offer insurance that does something along the lines of covering your minimum monthly payment if you find yourself out of work. Moral hazard and adverse selection, however, make such private employment insurance schemes unprofitable except at outrageously high premiums/low benefits.

At the high income end - I think part of the reason that the parental/maternal leave benefits, also the compassionate care/sickness benefits through EI are so popular is that they appeal to precisely this group of workers.

But, yes, EI is useless for high income workers. But given the regional and occupational redistribution present in the existing EI scheme, as well as the problems of moral hazard, adverse selection, etc, would you rather pay premiums high enough to make it useful to you, or pay a minimal amount into a program that you likely won't ever benefit from?

[Patrick]

What if we just rolled CPP and EI all into one and called it 'payroll tax'. Would that give everyone the warm fuzzies?

Practically EI premiums are really a generic payroll tax. The government diverts funds from the EI reserve to general revenue whenever it feels like it (I think the practice has actually been the subject of lawsuits against the gov't, but I could be confused on that). So if it makes your protagonist feel better, she can think of it as a generic tax that doesn't entitle her to anything in particular, apart from the rights, privileges and benefits she gets from being a Canadian citizens. Maybe think of it as paying for Granny's pension. You wouldn't deny Granny her pension, would you?

[Andrew F]

I think the idea is that high income earners should be able to self-insure more readily. The common personal finance advice is to have at least 6 months living expenses in an emergency fund. If you keep this in a liquid investment like a savings account, the opportunity cost vs. equity or long-term bond investments can be looked at as a kind of insurance. Even though EI doesn't cover fixed expenses for high income earners, it can help your contingency savings go a bit further while retaining the strong incentive to find new employment.

[Mike Moffatt]

"also if it means that employers have an incentive to keep employees just below the eligibility threshold."

But that'd create jobs! (kidding)

The current system we have gives incentive for employers to outsource jobs to India. It was designed for a pre-internet world.

[david]

Frances: I was thinking more along the lines of moral hazard from the worker's side, particularly where i) the job might be seasonal, ii) the fact that they were employed or not would be more likely to be influenced by their own decisions, or iii) the job is not necessary for their support. The very point of politically influenced transfers is to be unfair, i.e., to give subsidies, protection, etc. that would not be available in a voluntary transaction, such as private insurance. The benefits provided are not earned in an economic sense. So in order for some to get benefits they didn't earn, others have to pay in excess of what they ought to. I am not defending it. It just seems to me that, in essence, what you are (perhaps legitimately) complaining about is a feature not a bug.

[osprey]

What about this one?

It's his first job. He started working at the age of 23.

He worked for 21 years.

He got cancer, and was off work
on disability for two years.

He recovered, but his job was gone.

He is now looking for work.

He paid into the EI fund for 21 years.

He makes $40,000 a year.

Is he eligible for EI benefits?

[Mike Moffatt]

Also, I'm not sure 'Mike, there is a real problem with that kind of proposal if it means that people who work multiple part-time jobs can't qualify for EI benefits' why this should necessarily hold. Why would an EI floor mean that people who work multiple part-time jobs be ineligible?

[Frances Woolley]

Mike: "The current system we have gives incentive for employers to outsource jobs to India."

Let's look at the numbers.

EI premiums increase the cost of hiring a worker by 2.42 percent, *assuming* that the employers EI premiums are 100% incident on the employer, which is unlikely to be the case, except for minimum wage jobs. (Employers pay 1.4 times the 1.73 that employees do).

As the business editor of Canadian Public Policy, I've thought about outsourcing our typesetting and copyediting to India. If we do so, it would be because our costs would be cut by 50 or 80 percent, not because we'd save 2.42 on payroll costs. That we don't actually pay, because our translator, copyeditor, etc., are all self-employed professionals who invoice the journal for their services.

The impact of an EI floor would depend upon whether it was implemented on a per-employer or a per-worker basis. If it's on a per worker basis, then the employer has an incentive to keep every worker below the threshold - just like right now minimum wage employers set shifts just short enough that the workers aren't able to qualify for a paid lunch break. If it's a per employer basis that incentive doesn't exist, but I don't really understand the logic for that kind of an exemption.

[Frances Woolley]

Sorry, I meant to say "except for minimum wage jobs"

[Mike Moffatt]

"If it's on a per worker basis, then the employer has an incentive to keep every worker below the threshold"

True, but with the benefit of having a far more progressive system. That's a trade-off I'll take 10 times out of 10.

[Mike Moffatt]

And RE: "EI premiums increase the cost of hiring a worker by 2.42 percent, *assuming* that the employers EI premiums are 100% incident on the employer, which is unlikely to be the case, except for minimum wage jobs."

If the floor were set at, say, $5,000, it'd really only apply to minimum wage jobs at the margin. (Because anyone making over $10.25 an hour will likely make an amount above the floor).

[Mike Moffatt]

I think I'm doing an abysmal job of explaining it. So instead I'll link to Scarth's proposal:

http://www.cdhowe.org/pdf/scarth.pdf

[anon]

The "employers have an incentive to keep employees off EI" issue is not a problem, AFAICT, since folks will want to qualify for EI and choose employers accordingly, or else be compensated with higher wages. There might be an adverse selection problem, but this can be offset by charging lower EI premiums to folks who work in industries with better job security.

The real problem with EI (i.e. why it is not offered on the private market) is moral hazard, and allowing employers to opt out does not really affect this problem one way or the other.

[Ben]

Hi Frances: you wrote "But there's no reason why EI premiums couldn't be refunded come income tax time for people with too few hours to qualify." Forgive me if I misread something and I am just repeating something that has already been said, but I think they do refund EI when people work too few hours to qualify for benefits. For example, in each of the last two years my wife (who is a student) worked part-time jobs and therefore paid some CPP and EI; we expected that these contributions would not be refunded because they were both below the annual maximum amounts. But then when she got her refunds, they counted her ENTIRE CPP and EI contributions are overpayments and refunded them entirely. It was a nice surprise to been given back MORE than requested! I did not know why they did so at the time, but I am now thinking it is because she does not qualify for benefits.

[Frances Woolley]

Ben, this link http://www.nevcon.com/forms/pd24e-refund-cpp-ei.pdf describes the situations under which EI premiums can be refunded. If the employer misreads the tables and deducts to much, or if the person was not engaged in 'insurable employment', then the premiums are refunded. But EI isn't refunded for people who have too few hours to qualify for benefits - in order for the income tax system to do that, they would need to know people's hours of work, where they were living, and whether or not the person was a new labour market entrant. I'm pretty sure that degree of information sharing between HRDC and CRA doesn't happen on a day-to-day basis.

Anon, "since folks will want to qualify for EI and choose employers accordingly" - we're talking about the bottom end of the labour market here, where people take what they can get. If you believe what Steve Gordon says about minimum wages being a binding constraint - i.e. the minimum wage is higher than the wage that employers want to pay/people are willing to accept - then both employers and employees who are at that bottom end of the labour market will find ways to reduce the effective wage rate. Keeping hours just below the minimum required to qualify for benefits is one way that this happens.

[AJ]

As my Accounting Prof used to day it's Employment 'Insurance' it's an Employment 'Tax'. Meddling with labor market dynamics is another social failure but political success in regional politics.

[AJ]

As my Accounting Prof used to day it's Employment 'Insurance' it's an Employment 'Tax'. Meddling with labor market dynamics is another social failure but political success in regional politics.

[Determinant]

All insurance involves pooling of risk. No pooling, no insurance, even in the private sector. The problem with EI is that the EI concept was supposed to ameliorate *cyclical* unemployment or involuntary unemployment, such as an employer conducting layoffs. There is an implicit assumption that alternative work is available can be found within the claim period.

Hah. I have ten stories of foot-dragging employers and interview shenanigans for that one. Best one from October 2008, a company in Brockville whose clients were in Finland and Ecuador said to my face after the interview: "We like you, we'd like to hire you, but our customers don't have any credit anymore due to the banking crisis and have cancelled their orders. We can't hire you. Here's $40 for gas."

EI has problems when it is aimed at structural unemployment. Fisher's Benefits are a case in point. This is subsidizing structural underemployment in marginal economic areas. It papers over the fact that these places don't have the economy to support their present population. Thus EI degenerates into welfare.

EI also has huge problems when after carrying this welfare burden it is faced with a cyclical downturn in the generally better-performing economy of Ontario. Yeah, we get the worst EI coverage in Canada but EI won't extend benefits near enough to compensate people for their diminished prospects.

It's partly a result of our skewed House of Commons which overrepresents smaller provinces and underrepresents Ontario by 20 seats.

[Jim Sentance]

Maybe I should be complaining here too. With this damned institution called tenure, I'll never be able to collect EI either.

[Frances Woolley]

Jim - there's always parental leave...

[Jim Sentance]

I'm afraid we're a little past that unless I can go on Grandparental leave.

[Determinant]

May I point out that if there is no risk involved in the administration of the EI Benefits system, it isn't insurance. No risk, no insurance.

Now, if you would like a welfare system instead without risk attached to its administration that's a valid policy choice, but a spade is a shovel, people.

[Mike Moffatt]

I was thinking about this last night.

I'm 34 years old and I've earned income from working every month of my life since I was 8 years old. That's 26 years. I've:

- Delivered newspapers/flyers/catalogues
- Worked in a sportscard store
- Been a baseball umpire
- Worked for Greenpeace
- Sold computers
- Been a freelance writer
- Been a research assistant, teaching assistant, lecturer
- Director of Communications for a consulting firm

In those 26 years, I have *never* held a job where I was eligible for EI - either because I was too young, an independent contractor or was a contract where I would not have had enough hours to qualify. But in at least half of those jobs I paid into the system. If I had to guess, I'd say I've paid at least $10,000 into the system over 13 years (16 years over 18 - 3 years living abroad).

EI simply does not work in a world where jobs can easily be transfered overseas and more of us are working as independent contractors.

[Mike Moffatt]

Re-did the calculation.. $10,000 is probably a stretch - closer to $6000-$7000.

[Patrick]

"EI simply does not work in a world where jobs can easily be transfered overseas"

Speaking of people collecting EI - just learned that the Giant Corporation that I work for is in the process of off-shoring (drum roll) ... the finance and accounting dept.

Ugh.

[Simon C.]

I'm not knowledgeable about this, but I remember hearing that EI fund weren't kept separate from other federal funds. Basically , there's no EI "chest" with the workers' money in it. Once it's collected, it is federal money and can go in whatever program they feel using it for.
If that's true,

I'm not clear how Duceppe can say that the liberals took X$ from the workers, and the conservatives Y$.

To me, EI feels more like an employment tax than an insurance because of this. And a very regressive tax at that : the cost is 1.73% of the first 43 200$ you pay, then it's free. Put another way, your marginal tax rate drops by 1.73% at 43 200$. (1)

Now, why the feds would take 1.73% of 43 200$ ($747.36) for my employment insurance then give me a tax credit for "Canada employment amount" worth a maximum of 1051$*15% = 157$ (2) is beyond me.

(1)See part 2 of this file for EI premium calculation): http://www.cra-arc.gc.ca/E/pbg/tf/t2204/t2204-10e.pdf
(2)For the tax credit see http://www.cra-arc.gc.ca/E/pbg/tf/5000-s1/5000-s1-10e.pdf

[Simon C.]

That being said, I wish I won Lotto 10/42 :o) (work 10 weeks, win 42 weeks of paid holidays)

http://www.aims.ca/en/home/library/details.aspx/490

[Randy E]

I paid into EI for 6 years as a grad student, yet not one of those hours was insurable. For the last 4 years, I've been working as a sessional instructor, and, at least according my T4s, etc., I've paid into EI but I've not worked a single insurable hour. At least I get paid fairly well now. But it still irks me. If I can't collect, why should I pay?

[Frances Woolley]

Simon C -"EI fund weren't kept separate from other federal funds."

They are kept separate, but increasingly they're being used for programs e.g. compassionate care leave, job training etc., that probably would have been funded from general government revenues in the absence of EI. So even though they are notionally separate, in practice it's not so clear.

On the overall tax system - basically if you work out the impact of EI, CPP, child benefit tax backs etc. our tax system looks a lot like a flat tax system - a person with two kids and an income of $30,000 could be paying a marginal effective tax rate as high as a person with an income of $100,000.

By the way, the person mentioned in my post doesn't have any taxes owing, so as well as not qualifying for EI benefits, is also not able to get any benefits from claiming the EI tax credit.

[Bob Smith]

And all this without getting into the ridiculous regional differences in the eligibility requirement for hours worked. I mean, the inter-provincial differences are bad enough (if you're unemployed, you're unemployed, regardless of whether you're in NFLD, Quebec or Ontario), but you get goofy differences within provinces, depending on the local unemployment rate. Imagine a scenario where you qualify for EI on one side of the street (because you live in city A, with a high unemployment rate) but not if you lived on the other side of the street (because that's in city B, with a lower unemployment rate).

[Simon C.]

Frances : Thanks for clearing that up.

I'd be curious to see a graph of the marginal rate for various scenarios.