The next 25 years saw various changes that chipped away atUnemployment Insurance by making it harder to qualify for assistance andreducing the level and duration of benefits. Eligibility requirementswere tightened, the maximum length of benefits was shortened and the benefitrate lowered.
A major turning point in the life of the program came in 1995 whenthe federal government introduced a new philosophy to underpin UnemploymentInsurance. Ottawa announced that, effective July 1996, ‘Employment Insurance’ would replace the oldprogram. The name change was intended to signal a fundamentalphilosophical shift –from ‘passive’dependence to ‘active’employment. The objectives of the overhaul were to keep unemployedworkers off the program, move current recipients off as quickly as possible andencourage greater workforce participation through skills training andupgrading.
The new Employment Insurance Act provides for two types ofbenefits: income benefits and employment benefits. Income benefits paytemporary income support for income claimants while they look for work.The new Act changed the three key levers on the income side of theprogram: eligibility, benefit levels and duration of benefits. Thepurpose of these changes was purportedly to ‘strengthen incentives towork.’
Eligibility for benefits is now based on number of hours ratherthan number of weeks worked. The stated purpose of this change was toallow more flexibility in the program and to enable part-time workers, inparticular, to qualify for Employment Insurance.
At the same time, however, the Act tightened up the eligibilitycriteria by substantially increasing the number of hours required to qualifyfor benefits. Workers now must put in from 420 to 700 hours (or theequivalent of 12 to 20 weeks), depending on the unemployment rate in theregion. This change represents an increase of between 180 and 300 hoursover the former entrance requirement.
Claimants applying for sickness, maternity or parental benefitsneed 700 hours of work. (Changes announced in the February 2000 federalBudget reduced the eligibility requirement to only 600 hours of work.)New entrants to the labour market and those who have been out of paid work forsome years must establish a reasonable attachment to the job market before theyare considered eligible for Employment Insurance. Newcomers or thosere-entering the labour market must work a minimum 910 hours before qualifyingfor the program.
Benefits are calculated as 55 percent of average insurableearnings. The upper limit in the band of earnings over which benefits arecalculated (called the ‘maximum insurable earnings level’) fell from $42,380 to$39,000. Maximum benefits dropped to $413 a week.
Employment Insurance also imposed an ‘intensity rule.’ Recipients face a penaltyof a one percentage point reduction in their benefit replacement rate aftereach 20 weeks of benefits, reducing the rate from 55 percent to as low as 50percent. This rule was intended to reduce the heavy repeat reliance onEmployment Insurance by seasonal workers, encouraging them to seek full-timework.
Employment Insurance continues Unemployment Insurance’s practice of imposing an incometest. Better-off recipients must repay part of their benefits at the rateof 30 percent above $39,000 for those collecting benefits for 20 weeks or more,and above $47,750 for those with less than 20 weeks.
A Family Income Supplement (a maximum $413 a week) was introducedin order to provide higher benefits to families with annual incomes of lessthan $25,921 that are eligible for the Canada Child Tax Benefit. TheFamily Income Supplement varies by number of children. The EmploymentInsurance benefits of these households, along with the Family IncomeSupplement, could represent up to 80 percent of their insured income.
The new Employment Insurance Act reduced the maximum length ofclaim from 50 to 45 weeks. The savings produced through changes to theincome component of the program were directed toward employment benefits.These include a package of measures wage subsidies, earningssupplements, self-employment assistance, job creation partnerships, and skillsloans and grants to help workers prepare for and find a job. A three-year, $300 millionfund also was created and paid for by federal tax revenues to generate economicgrowth and new jobs.
As a result of these changes, Employment Insurance coverage ofunemployed workers has dropped dramatically. The percentage of theunemployed covered by the program in 1997 was less than half of what it was in1989 falling from74 percent to 36 percent of the unemployed.
In response to concerns about the drastically reduced coverageunder the program, Ottawa introduced legislation in September 2000 to amend theEmployment Insurance Act. The proposed legislative amendments wouldeliminate the intensity rule and ease the benefit repaymentprovision.
Unemployment Insurance was conceived as a critical component ofthe universalist model of social policy. Like child benefits, it has justas important a role to play in a post-welfare state approach.
But in our view, neither Unemployment Insurance nor EmploymentInsurance works. They should be replaced by a new system of incomesupport for adults that retains an insurance-oriented program for those onlyoccasionally or short-term unemployed. The new system would replace bothsocial assistance and the regionally extended benefits of Employment Insuranceby a more effective income-tested program with strong labour market components.
Uneasy Compromise between Universalist andPost-WelfareModels
We conclude this description of Canada’s transition to a post-welfaremodel with a discussion of the attempted reform of elderly benefits inCanada. These are not considered ‘active’ programs in that they areintended for persons who have left the labour market. But the story is aninteresting one in the sense that the evolution to the post-welfare state hasbeen far from easy or complete.
Canada has a multi-tier retirement income system with public andprivate elements. The base is made up of an almost-universal,income-tested old age pension program, along with more targeted programs forpoor seniors. Both are financed through general governmentrevenues.
The second, also public, tier is the contributory earnings-relatedCanada Pension Plan (and, in Quebec, parallel Quebec Pension Plan) that coversthe entire workforce.
The third private tier is composed of employer-sponsored pensionplans, known as occupational pension plans, and individual retirement savingsaccounts, known as Registered Retirement Savings Plans. Both of theseplans are used mainly by some middle-income and most upper-income Canadians.
There is a fourth public tier that consists of income taxbreaks. These partially offset the cost of contributions to the Canadaand Quebec Pension Plans, occupational pension plans and retirement savingsplans.
A Mix of Direct and Tax-Delivered Programs
There are five programs in the base tier, three paid directly andtwo through the income tax system.
The core program within the base tier is Old Age Security, createdin 1952. It pays a flat-rate, but taxable, monthly payment. Whilethe benefit is income-tested on the basis of individual income, it still goesto almost all (95 percent) of Canadians age 65 and older. It excludesonly those with high incomes. Benefits are fully indexed to the cost ofliving on a quarterly basis.
For the fourth quarter of 2000 (i.e., October-December), themaximum monthly payment is $429. However, this amount is subject both totaxation and to an income test. The income test applies only toindividual net income above $53,960, which represents only five percent of seniors. Recipientsmust have lived in Canada for at least 10 years or have immigrated fromcountries which have international social security agreements withCanada.
The second program, the Guaranteed Income Supplement, was createdin 1967 for low-income seniors. The Guaranteed Income Supplement is farmore targeted than Old Age Security, though benefits are not taxable.
The maximum Guaranteed Income Supplement payment ($510 a month fora single person and $327 for each member of a couple, for the fourth quarter of2000) goes to seniors with no income other than Old Age Security.Benefits are reduced by 50 cents for every dollar of other income, excludingOld Age Security. In the case of a couple, eligibility for and the amountof the Guaranteed Income Supplement are based on the combined income of the twospouses. Like Old Age Security, the Guaranteed Income Supplement isfinanced out of federal general revenues.
The Spouse’s Allowance was legislated in 1975 to provide benefits equal tothe sum of Old Age Security and the Guaranteed Income Supplement to the60- to 64-year-old spouses of pensioners who receive the GuaranteedIncome Supplement. In 1979, the Spouse’s Allowance was expanded tomaintain benefits to recipients who become widowed. When they reach 65,they move on to Old Age Security and the Guaranteed Income Supplement.
In 1985, the program was extended further to cover all low-incomewidowed persons aged 60 to 64, even if they had not first qualified for thebenefit when their spouses were alive. Like the Guaranteed IncomeSupplement, the Spouse’s Allowance is an income-tested program that pays its maximumamount to the poorest seniors. It includes a partial and declining amountto eligible women and men with some other income. The Spouse’s Allowance is nottaxable.
In addition to these federal benefits, several provinces andterritories Ontario, Manitoba, Saskatchewan, Alberta, BC, Yukon and the NorthwestTerritories provide income-tested supplements for seniors. These supplementsgenerally are paid to recipients of the Guaranteed Income Supplement becausethey already have qualified for the federal program on the basis of lowincome. These benefits vary widely in value. Nova Scotia providesincome assistance through its welfare system for seniors deemed to be‘in need’ on the basis of a needstest.
This first layer of the Canadian pension system also includes twotax breaks for seniors and private pensioners who owe income tax. Theseare the income-tested age credit and the pension income tax credit.
The age credit provides a nonrefundable tax credit to taxpayersage 65 or older. It is worth a maximum $900 in total federal and averageprovincial income tax savings. The age credit is income-tested aboveindividual net income of $26,284.
The pension income credit is also nonrefundable through notincome-tested. It provides a tax break of up to $255 in combined federaland average provincial taxes to taxpayers who have income from occupationalpension plans or individual retirement savings plans. Taxpayers withincomes too low to owe income tax do not benefit from these two taxbreaks.
a. From universality to broad basedincome-testing
Old Age Security used to be seen as a centrepiece of theuniversalist model of Canadian social policy, along with universal FamilyAllowances. Yet both programs were replaced by income-tested benefitswith little political difficulty, even though seniors and children’s groups mounted strong publiccampaigns to fight the changes.
The end of universality began in 1989. The ConservativeFinance Minister introduced a special tax on Old Age Security and FamilyAllowance benefits which became known as the ‘clawback.’ Old Age Security andFamily Allowance recipients with individual net incomes over $50,000 had torepay their benefits at the rate of 15 cents for every dollar of net incomeabove the $50,000 threshold.
The clawback of Old Age Security benefits from seniors with netincomes over $50,000 affected only four percent of seniors when it wasintroduced in 1989. Relatively few elderly Canadians have incomes thathigh and the measure was phased in one-third at a time over three years.
But the Conservative government at the time was careful to onlypartially index (to the amount of inflation over three percent a year) the$50,000 trigger level for the clawback. Partial deindexation meant thatthe trigger level for the clawback declined steadily in real terms each yearand so hit more and more seniors.
Only in 2000 was the threshold fully indexed, rising from $53,215in 1999 to $53,960 for 2000. But the latter amount is worth only $42,540in 1989 dollars. This means that the threshold fell by $7,460 in constantdollars a sizable14.9 percent decline between 1989 and 2000.
While Old Age Security is now an income-tested benefit, it istargeted high up the income range. The 2000 Budget’s decision to fully index theincome threshold above which the income test is applied means that the gradualerosion in the reach of Old Age Security has ended. It will remain a verybroad based social program serving the great majority of seniors.
The seniors’ lobby and social advocacy groups fought the clawback just as hardas they had the partial indexation proposal four years earlier. But theConservatives’campaign to convince the Canadian public of the seriousness of the debt/deficitproblem had helped change the political climate. The government did notwithdraw the clawback.
The clawback was one of the pivotal events in the history of theCanadian welfare state. It removed the ‘sacred’ universal foundation of thepublic pension system. Significantly, there was almost no publicopposition to this fundamental change toward a post-welfare social securitysystem.
One explanation is that the clawback was a complex and hard tounderstand technical measure. It was a technical change that mostCanadians could fully grasp. But another possible explanation is that Canadians no longer wereas firmly wedded to the notion of universality as they were in thepast.
The 1994 federal Budget took a small but firm step along thedifficult road to pension reform. It imposed an income test on the agecredit, which used to be available to all seniors who owe incometax. The full age credit is now available only to elderly taxfilerswith net incomes under $26,284. It is reduced by 15 cents for everydollars of net income above that threshold. This means that seniors withnet incomes over $49,824 do not qualify for any age credit.
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