EI, Self-Insurance or Three-Card Monte?

Monte Solberg, the former Conservative cabinet minister responsible for Employment Insurance, proposed to eliminate the program in a recent Sun Media column:

An alternative would be to self-insure. Employee and employer premiums would accumulate in an account in each worker’s name. Including interest, anyone who managed to stay employed through their lifetime earning even a modest income would stand to collect several hundred thousand dollars at retirement.

The concept of insurance is that pooling premiums from many people provides enough money to compensate only those who suffer losses. It makes no sense to assume that saving up each individual’s premiums could compensate if he or she actually suffers a loss.

I debunked Solberg’s proposal when I was asked about it on The Lang & O’Leary Exchange the week before last. But it’s worth going through the numbers in more detail than was possible on television.

This year, the maximum employee premium is $891 and the maximum employer premium is $1,248, for a total of $2,139 per employee. About 60% of Employment Insurance funds are spent on regular benefits as opposed to parental leaves, training, etc. So, an employee contributing the maximum would deposit $1,283 this year under Solberg’s scheme.

This year’s maximum Employment Insurance benefit is $501 per week. For each year worked, an employee would accumulate enough money to self-insure against two and a half weeks of unemployment.

The average duration of unemployment for a jobless or laid-off Canadian is 20 consecutive weeks. Under Solberg’s scheme, someone would need eight years of continuous employment to self-insure against one average period of unemployment.

In fairness to Solberg, he does suggest, “Maternity and compassionate benefits could be spun off into separate government programs.” But these programs would still need to be funded. The only way to make self-insurance work would be to hike premiums, or raise other taxes to pay for the programs other than regular benefits.

Beyond self-insurance against unemployment, Solberg claims, “Including interest, anyone who managed to stay employed through their lifetime earning even a modest income would stand to collect several hundred thousand dollars at retirement.”

Let’s imagine someone who contributes the maximum every year for 40 years. If his or her earnings and contributions increase by 3% every year, the annual deposit would rise from $1,283 this year to $4,064 four decades from now.

If the money accrued 3% annual interest, the employee would have $162,559 at retirement. That’s nothing to sneeze at, but it’s not “several hundred thousand dollars.”

For argument’s sake, let’s assume that Solberg has a plan to pay for parental leaves, training, etc. as separate programs. In that case, someone contributing the maximum would get $2,139 in their account this year. Using the same assumptions, their retirement nest-egg would be $270,932.

That’s more than a couple hundred thousand dollars, but I am still not sure it qualifies as “several hundred thousand dollars.” In any case, if we are projecting pay increases and compound interest four decades into the future, we should also consider inflation.

The Bank of Canada targets 2% annual inflation. At that rate, $2.16 will have the same purchasing power in forty years as a dollar today. So, that self-insurance fund would be worth $125,156 in today’s dollars.

Extensive political struggle and a constitutional amendment were required to implement Employment Insurance. Canadians should not be conned into giving it up based on false promises of “several hundred thousand dollars” for those fortunate enough to always make at least the maximum insurable earnings and never be unemployed.

Erin Weir is an economist with the United Steelworkers union and a CCPA research associate.