Saturday, December 7, 2013

Privatize Employment Insurance?

On Friday I did a spot on Alberta Primetime about the Canadian Taxpayers Federation (CTF) proposal to privatize Employment Insurance (EI) benefits. You can read the proposal here.

The crux of the CTF’s proposal is eliminating government-managed EI that allocates benefits on the basis of “hours worked” and local unemployment rates. In its place, each worker would get an individual account into which the worker and employer EI premiums (this maxes out at about $2100 a year) would be deposited.

Workers could then draw on these funds to support themselves while unemployed, use it for training, and roll any excess into a retirement fund when they call it a day. These individual accounts would be held by individuals at banks and investment firms kind of like RRSPs or RESPs (or could be left with the government to manage).

A basic problem with the CTF’s proposal is that there is no good rationale for the massive policy change it proposes.

The CTF claims the EI system inequitable distributes EI funds. Specifically, Atlantic Canadians and Quebecers get more than they pay and this is funded by workers and employers in Ontario and western Canada. Of course, EI isn’t designed to equitably distribute funds, it is designed to distribute funds to the unemployed. So, in fact, the system is doing exactly what it was designed to do.

And it mirrors the long-standing Canadian tradition of sharing good and bad fortune with others via economic transfers. Flood in Calgary? Everyone chips in tax dollars to help. Unemployment in PEI? Everyone chips in EI premiums to help.

The CTF also claims that dividing Canada into 58 “economic zones” is confusing and unfair. These “economic zones” are simply cells in a fairly straight-forward table (you can see it here if you scroll down to Table 3). Basically the more hours you worked and the higher the local unemployment rate, the longer you can receive EI benefits (which seems like a reasonable way to allocate benefits). Depending on these factors, your EI benefits can vary from zero weeks to 45.

The CTF highlights some of the quirks of the system, where people living in urban areas (where there are more employment opportunities) get less EI than those living a stone’s throw away in a rural area (where unemployment is higher). These quirks arise out of an effort to link benefits to employment opportunities and are hardly an argument to privatize EI. If EI didn’t distinguish on the basis of local unemployment rates, then the CTF would complain about that—a total catch-22 for EI program planners.

The CTF also trots out the moral hazard argument, where (unnamed) workers are said to be gaming the system to avoid work. Ignored are the actual reasons for repeated use of EI, such as lack of any job opportunities, lack of jobs due to seasonal employment, lack of decent jobs and other complicating factors (e.g., sickness, new baby, dying relative).

At the heart of this “argument” seems to be a misunderstanding about how insurance works. I’ve never made a claim on my home fire insurance (fortunately). And I certainly don’t begrudge those who have. This is because making an insurance claim isn’t a moral failure—it is simply something you do when the event you insured yourself against occurs.

Finally, the CTF claims the EI system has high administrative costs (about 11% of premiums are used for “administration”). This is pretty much in line with the cost of running EI systems in other OECD countries (the average is 8%) and it is unclear what “administrative costs” entail—is training to get people back to work buried in there?

What the CTF doesn’t tell you is that any system has administrative costs. The cost of the public system is easy to see because it is all tallied up in federal financial statements. The cost of the CTF’s proposed private system is hidden and will be applied to each worker in the form of administrative fees (e.g., mutual fund management fees). These fees will include not only the cost of operating the system, but also a profit for the bank or investment advisor. There is no estimate of the net savings, but my guess is that it will wash out.

Interestingly, the CTF’s calculations about how much each person would have under their proposal don’t include these fees. They also don’t use real (i.e., inflation adjusted) dollars (although they do increase annual payments by inflation). These two (rather glaring) oversights mean their calculations are wildly optimistic (we won't have that much money and it won't be worth as much as it sounds like in 40 years) and that we shouldn’t trust their math. Similarly, the CTF constantly uses numbers for a “couple” in the report which is misleading unless you read very carefully because this “doubles” all of the numbers they use (so things sound better than they will be).

Setting aside that there is no real rationale for this proposal, there are some implications that are alarming (but, of course, not explored in the CTF position paper).

The CTF (very obliquely) suggests (on p.14) kicking nursing moms and the disabled (who account for 27% and 6% of total Alberta EI claims respectively) off of EI even though they are out of work and paid into the EI system. Nice.

The CTF suggests that a worker employed full-time at a wage of $47k or better will have $530k saved after 40 years (they of course use the couples doubling so it sounds like a million-dollar idea). But they don't talk about workers in depressed areas who won’t make $47k a year thus won’t have a full $2100 put into their personal EI account each year and will need all of that and more to keep the heat on and fridge full during periods of unemployment.

To put this in real world terms, well-off workers in western Canada will be able to buy condos in Phoenix when they retire while children in New Brunswick and Nova Scotia will go to school hungry and without winter coats. Because of this (of course unmentioned) dynamic hidden within the proposal, the CTF’s proposal is unkind, unjust and, frankly, immoral.

The CTF then goes on to suggest that, if EI is eliminated in (say Newfoundland and Labrador), employers will increase workers’ wages to make up for it. That is contrary to the history of wages and working conditions, where desperate workers will accept lower wages to keep food on the table, employers know that and grind workers wages down (rather than increasing them). It also seems to ignore that, in a global economy, if employers raise wages, their product will be uncompetitive and they will go out of business. It is baffling how the CTF can advance a proposal so at odds with basic labour-market economics.

What will most likely happen is that employment-aged people in Atlantic Canada and Quebec will either live in poverty or migrate (permanently or temporarily) to hotter economies. This population drain damages the sending communities and it also floods the labour market in receiving communities, thereby depressing wages in hot economies. How is this good for anyone, except the banks and investors who will get to charge management fees?

Overall, the CTFs proposal lacks a rationale, is misleading and oblivious to labour market dynamics, and works immediate and real-world harm on workers (and their families) in Atlantic Canada and Quebec in order to benefit well off workers in western Canada and bankers. If this was a student’s paper, it would warrant an F.

-- Bob Barnetson

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