Thank you Mr. Chairman.
My name is Michel Bédard and I would like to thank you for inviting the Canadian Institute of Actuaries to appear before your committee to discuss the creation of the Canada Employment Insurance Financing Board, as provided for in Bill C-50.
Our profession puts public interest before its own needs and those of its members. It is with that in mind that in December 2007, we published our report on the funding of employment insurance and that is we are appearing before your committee today.
We support the creation of the Canada Employment Insurance Financing Board, an independent board to supervise the funding of the plan; however, there are major aspects of this bill that could lead to problems for workers and employers as well as for the government itself.
The merit in this new system, of course, lies in the fact that after 2008, all costs and premiums will be balanced. However, forcing the financing board to maintain that balance on an annual basis, one year at a time, represents a serious handicap and will lead to fluctuations in the premium rates, and, more particularly, will trigger a procyclical rate increase at the first sign of a recession.
To illustrate, let's look at the following scenario. A recession hits Canada. Unemployment levels rise to 8%, which is 2% higher than now, increasing payments to out-of-work Canadians by about $3 billion. What happens? The board's $2 billion reserve is totally depleted. The EI account is forced to borrow another $1 billion from the government, even though, by the way, the EI account shows a surplus at this date of $56 billion. Unemployment levels might rise further. The government fiscal balance falls into deficit.
When the premium rate is set for the following year, several things will need to happen. First, the $1 billion that was borrowed by the EI account will have to be repaid, and so premiums will have to rise to cover that. The $2 billion so-called reserve has to be repaid within a single year. Then, of course, an increasing number of Canadians are out of work, and premiums have to increase to cover those extra costs.
Well, consideration of raising the premiums above the legislated limit of 0.15%, which is in the current legislation, will then fall to ministers. This will not be an easy decision in a weakened economy and weakened fiscal position.
We can look at the many times that the government substituted its health to the EI commission in the past to see that this is a real risk and a real possibility. Of course the impact on Canadian businesses, which pay for nearly 60% of the EI program costs, will be significant at those times when their cashflow and profits are severely reduced. And workers, who foot the bill for 40% of the EI contributions, will also be deeply impacted.
We believe having a five- to seven-year time horizon, closer to the normal course of a business cycle, would eliminate the necessity of raising premiums at the precise moment when they need to be stable, not increasing. Our calculations also indicate that an actuarial reserve of $10 billion to $15 billion would be needed to stabilize premium rates over such a timeframe. The rest of the existing surplus, which now stands at $56 billion as I pointed out, is not needed for the proper financial management of the EI program.
Even during an economic downturn that's not as deep as the one I described.... Even deeper recessions might also be possible, but during a smaller economic downturn, the one-year look-forward system would necessitate raising premiums on each occasion, pro-cyclically. Canada's actuaries believe this mechanism needs to be abandoned.
In fact, the proposed system is likely to produce premium rates that vary erratically from year to year, even in normal times, to recover normal forecasting errors. The so-called reserve of $2 billion does nothing to prevent this, as it must be rebuilt each and every year. In this sense, it is not a real reserve under that proposed system. It will not help stabilize premium rates at all. In fact, there is no fiscal cost for the government in any of this, of course, as the new board's operations will be entirely consolidated with those of the government.
Bill C-50 also has a number of restriction override provisions that, in our opinion, minimize or undermine the promise of independence put forward by the Minister of Finance in the February 26 budget. Under proposed sections 66.1 and 66.2--it's paragraph 2(b) in each--ministers are authorized to regulate what is binding on the board in addition to the rules they have to follow in terms of setting premium rates for a year.
Proposed subsection 66(8) allows ministers to override the 0.15% limit.
Proposed section 66.3 allows ministers to override the board without even any limit, at any time.
And proposed subsection 80(2) allows the Minister of Finance to dictate these loans and the pace at which they will be repaid.
We conclude with three recommendations. First, as I pointed out, the Canadian Institute of Actuaries recommends that premium rates be set taking into account a five- to seven-year period, with an actuarial reserve of $10 billion to $15 billion drawn from the existing surplus of $56 billion--maybe not all at once, maybe spread out over time, but ideally, given through a truly independent body.
Second, the institute recommends that Bill C-50 be amended to allow the chief actuary and the board considerably more latitude in the assumptions and projections needed to develop the premium rates, taking into account a five- to seven-year time horizon.
Third, the institute must, as a point of principle, reiterate our position of principle that the existing surplus belongs to the EI system and to its contributors, and should be addressed clearly instead of being swept under the rug once again. And in that domain, I must point out, of course, that the Supreme Court will be hearing this very situation tomorrow morning.
Thank you.