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The ‘How’ ofIncome Security

a. Eligibilitycriteria

Once nations have identified the policy objectives they seek toachieve, it is somewhat easier to determine how to deliver thesebenefits. We say ‘somewhat’ easier because decisions as to the provision of income securitybenefits are never simple or straightforward.

The following factors must be considered. First, will theprovision of benefits create a disincentive to work Does thepossibility that the household is entitled to benefits affect in any way itsparticipation in the paid labour force

For example, one of Canada’s major income security programs,Unemployment Insurance, has been subject to criticism over the years. Theprogram (described below) is intended to provide temporary income support inthe event of unemployment.

But Unemployment Insurance has been criticized on the grounds thatit fosters dependency and lengthens the duration of unemployment. It hasbeen accused of being a poorly designed income support and regionalequalization program.

Unemployment Insurance also has been blamed for undermining thework ethic and feelings of self-worth that come from work, thereby erodingindividual and community initiative. The program is deemed to discourageself-employment and small-scale enterprise. Some say it compounds theunemployment problem of certain regions with a high degree of dependence on theprogram, such as the Atlantic region, due to a weak economic base dependentlargely on the fishery.

Programs that comprise the disability income system are subject tothe same scrutiny. If individuals are unable to work because of adisabling condition, they typically are considered to be ‘deserving poor.’ Questions rarely are askedas to whether they ‘deserve’to receive income assistance. Rather, the debate arises over how much topay and who pays.

But when individuals have some form of disabling condition yet arestill able to do some paid work, the policy challenges become immeasurably morecomplex. A major challenge lies in balancing the provision of incomesecurity with support for workforce participation. Unless persons withdisabilities can be sure that they can return to an income security program iftheir employment arrangement falters, they are unlikely to seek paidwork.

But the greatest controversies typically arise around socialassistance – theprogram of last resort. Welfare recipients generally are seen as the‘undeservingpoor’ because theyhave had to turn to this program to meet their basic needs. The receiptof welfare usually is interpreted to mean that they have some personal weaknesswhich prevents them from finding or keeping a job.

The fact that social assistance is viewed in this light is aserious problem. Policy responses often take the form of punitiveapproaches that seek to move recipients off the system as quickly as possibleand get them back to work. Governments may see their role as taking stepsto ‘free’ welfare recipients from their‘dependency.’ Taxpayers want to prevent ‘undeserving’ welfare recipients from gettingmoney ‘for nothing inreturn.’

These negative attitudes and stereotypes make it difficult todesign intelligent and humane income security policy. But they alsohighlight the importance of seeking policy responses that are both acceptablefrom a public (taxpayer) point of view and stable from the perspective of therecipient.

In short, in designing income security programs or reforming anydimensions of a given system, it is essential to be clear about the policyobjectives being sought. At the same time, it is important to recognizethat certain program designs will be more robust in the long-term  with respect to public support,political stability and adequate financing.

Another key aspect of income security design has to do withwhether a given program is developed as a social insurance or as atax-supported benefit. Social insurances and tax-supported benefits arediscussed below.

b. Income program design

i. Social insurances

Social insurances provide income protection by poolingcontributions against designated risks such as unemployment, retirement andaccidents on the job. Benefits are paid if contributors or eligibleworkers fall victim to the risk from which protection has been ‘purchased.’

There are three major social insurance programs in Canada:Employment Insurance (formerly known as Unemployment Insurance); the CanadaPension Plan and its twin operated by the province of Quebec, the QuebecPension Plan; and workers’ compensation. The federal government is responsible for theadministration of Employment Insurance and the Canada Pension Plan.Provincial governments run their own workers’ compensation systems.

In theory, a social insurance program is expected to adhere toinsurance principles. Individual contributors seek to protect themselvesfrom the insecurities associated with a given risk.

In the case of Employment Insurance, workers are protectingthemselves from the insecurity associated with unemployment. The CanadaPension Plan replaces earnings in the event of retirement or severedisability. Workers’ compensation provides protection against the financialinsecurities arising from injury on the job.

These programs are insurance-like not only in intent  i.e., providing protectionagainst risk. They are also insurance-like in design. Prospectivebeneficiaries make financial contributions to the program in order to build upa pool of funds. The pool then is used to make payments if the riskagainst which protection has been ‘purchased’ happens to arise.

Employment Insurance premiums are deducted directly from employeewages. Employers also pay a set percentage of their payroll in respect ofEmployment Insurance premiums. Self-employed workers are not eligible forbenefits.

Under the Canada Pension Plan, workers contribute a percentage oftheir wages (up to about average earnings) as contributions (i.e.,premiums). Employers match the employee contribution. Theself-employed make twice the contribution as both employee and employer.

Workers’compensation systems that fall under the auspices of provincial governmentsfunction somewhat differently. Only employers are expected to contributeto this form of social insurance. It is basically a collective provisionthat protects employers from potential financial ruin in the event that anemployee experiences a work-related accident and decides to launch a lawsuitfor damages.

Because workers and employers make direct contributions to socialinsurance programs, there is an implicit understanding regarding eligibilityfor financial assistance. Workers who have made the necessary paymentsfor the required periods of time expect to be eligible forbenefits.

In practice, however, the eligibility criteria are not as simpleas the contribution in/payment out process would imply. In addition tothe required payments, other sets of rules determine eligibility forbenefits.

In the case of Employment Insurance, for example, workers musthave made contributions to the plan for a minimum number of hours. Theyare entitled to receive benefits for a set number of weeks. The durationof benefits varies by the rate of unemployment in the area in which the workerclaims the benefits.

ii.Tax-supported income programs

Three types of income benefits are supported through generalgovernment revenues. These come from various forms of taxation e.g., income tax,sales tax, property tax, and customs and excise tax. Tax-supportedprograms include universal, income-tested and needs-testedprograms.

Universal programs

Universal income security programs provide benefits to allhouseholds that meet certain criteria  such as old age or presence ofchildren regardless of level or source of household income. Eligibility is notaffected by the receipt of assistance from other income programs.

The Old Age Security program, for example, used to deliverbenefits to all citizens aged 65 and over. Beneficiaries qualified on thebasis of their age and Canadian citizenship. However, changes starting in1989 moved the program from universal to income-tested, though benefits arereduced for or denied to only very well-off seniors.

Canada also used to have in place a universal system of FamilyAllowances. All families with children qualified for the monthly payment,whatever their income.

Universal programs are costly because they are designed to serve alarge pool of the population. However, universal programs do not have topay everyone the same amount of benefit.

In Canada, benefits from Old Age Security are subject to bothfederal and provincial income tax, as were (the now dismantled) FamilyAllowances. The programs sent the same benefits to all seniors and thesame benefits to all families with children.

But the real value of the benefits (after paying income tax onthem) was progressive. It decreased with seniors’ and families’ marginal tax rate. Thepoor got the full amount while the well-off ended up with only about half thebenefit.

Governments also can lower the costs of various income programs byadding to the list of eligibility criteria an element of ‘need’ in the form of income-tested andneeds-tested benefits.

Finally, two of Canada’s social insurance programs EmploymentInsurance and the Canada/Quebec Pension Plan  are universal in the sense thatlevel of income does not affect eligibility. Both are progressive becausebenefits are taxed.

Income-tested programs

All of Canada’s tax-supported income security programs, including the new CanadaChild Tax Benefit, the trio of federal benefits for seniors (Old Age Security,the Guaranteed Income Supplement and the Spouse’s Allowance) and the refundableGoods and Services Tax credit, are delivered on an income-testedbasis.

Income-testing narrows the range of recipients that potentiallyqualify for benefits. It also determines how much they receive.

Households whose net incomes fall below a level or ‘threshold’ receive the maximumbenefit. Above the threshold, benefits are reduced as incomeincreases. The ‘reduction rate’ is the amount by which benefits are reduced as incomerises. Benefits end entirely when net incomes exceed a designated amount,known as the ‘cut-offpoint.’

Needs-tested programs

Needs-tested benefits narrow the range of eligibility evenfurther. Needs tests are used to determine eligibility for a givenbenefit and also may be used to determine level of payment. Socialassistance is the major needs-tested program in the country.

Needs tests are employed to determine the presence and extent ofhousehold need. They do this first by determining whether householdsqualify on the basis of their liquid and fixed assets. ‘Liquid assets’ include cash and othercash-convertible securities, such as bonds. These liquid assets must fallbelow designated levels.

An assessment also is made of the household’s ‘fixed assets’ such as house, car or equipmentand tools. These assets must fall below certain levels in order forhouseholds to qualify for benefits.

If both liquid and fixed assets are in the permissible range, thenext step in the needs-tested process is to determine the total incomeavailable to the household. Possible sources include earnings, incomefrom self-employment, interest and dividends from investments, rental incomeand private sources.

Total income is then assessed against household need. Thelatter includes both basic requirements and special needs.

Basic requirements consist of essentials such as food, clothing,housing and utilities. Family composition is also taken into account(i.e., benefits vary by family size and by number and ages of children).Special needs refer to health- or disability-related requirements such asspecial eyeglasses, hearing aids, wheelchairs, medications and orthoticappliances.

c. Assessment of programdesign

The advantages of social insurances include the fact that they areintended to provide efficient, effective and fiscally responsible incomereplacement for the workforce. In theory, there is a sense of fairnessand reciprocity. Workers who have made the required payments receivetheir entitlement if and when the given risk against which insurance was‘purchased’ happens to arise. The use of collective provision offerseconomies of scale and efficiency over private, for-profitinsurance.

Recent policy changes that substantially have curtailedentitlement to Employment Insurance, the Canada Pension Plan disability benefitand workers’compensation have been criticized as negative changes. They are negativenot just from the perspective of potential beneficiaries who receive lowerentitlements or nothing at all. The policy changes are deemed negative inthat they decouple contribution from entitlement. They basicallydestabilize the ‘social contract’ that allows for continued public support of socialinsurances.

Public confidence in Employment Insurance, for example, has beenshaken by the fact that just over one-third of unemployed workers in Canadacurrently receive benefits under the program. There is a general feelingthat workers are not getting what they are paying for. They pay into theprogram when they are working, but most get nothing in return when they becomeunemployed.

Income-tested programs have their own unique advantages.They are seen to be objective, administratively simple andnonstigmatizing. Eligibility can be established easily through the incometax form. There are no decisions made on the basis of a detailedassessment of personal circumstances. There is little or no contactbetween recipients and government officials. Once eligibility isestablished, payments can be triggered automatically by computer.Benefits can be delivered on a consistent and equitable basis throughout thecountry.

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