October 16, 2020

New CERB replacements: Flawed program design could impede economic recovery

On September 27th, Canadians said goodbye to the Canada Emergency Response Benefit (CERB), a widely praised income support program that gave $500 per week to Canadians who were laid off or otherwise unable to work because of the economic shutdown. CERB has been credited with helping minimize the immediate damage from the shutdown and providing a safety net for those who needed it the most.

For Canadians who lost work, CERB will be replaced by a return to a simplified and more generous version of the Employment Insurance (EI) program. To fill in the gaps, the federal government is also introducing three new temporary income support programs while it designs further reforms to permanently modernize and expand EI.

There are some things to like about these programs, but reasons to be concerned as well. On the positive side, they continue to provide support to Canadians who are unable to work because of COVID-19; this is critically important as cases surge in many parts of the country. On the negative side, these programs are not only costly, but certain aspects may create a disincentive to rejoin the workforce—an issue that, if left unaddressed, could lead to labour shortages and hamper Canada’s economic recovery.

In this commentary, we explain why we’re concerned and highlight some reform options that could address the disincentive problem without unduly harming those who need income supports the most.

The bottom line: The current EI and recovery benefit programs are stopgap measures while the federal government develops a modernized Employment Insurance program. This new program needs to preserve the incentive for Canadians to find work by ensuring that no one is better off by avoiding a job. Poverty and barriers to labour force participation are better addressed through other government initiatives.

What’s new?

In a nutshell, CERB is being replaced by two program streams. Most people who were collecting CERB at the end of September will transfer over to a revamped EI program—one that has been simplified and broadened to make it more accessible and more generous than the version in place before COVID hit.

The second stream is a suite of three new recovery benefit programs aimed at supporting Canadians as the economy re-opens: the Canada Recovery Benefit (CRB); the Canada Recovery Sickness Benefit (CRSB) and the Canada Recovery Caregiving Benefit (CRCB).

Employment Insurance

Changes to EI make it easier to qualify for the program, the benefits are more generous, and people can collect it for a longer period of time. These changes are being made to accommodate the fact that the COVID economic shutdown made it more difficult for Canadians to accumulate the hours previously needed to qualify for EI.

In its previous form, EI provided Canadians who had lost their jobs with 55% of their income up to about $55,000—to a maximum of $573 per week. Eligibility and payment duration depended on local labour market conditions. The lower the unemployment rate in your area, the more weeks you needed to work to qualify for EI and the fewer weeks of benefits you received.  If you chose to work while collecting EI, the Working While on Claim provisions allowed you to keep 50 cents on the dollar until your total income (EI plus earned wages) reached 90% of your previous earnings. For example, an individual earning $45,000 per year ($865 per week) would have qualified for $476 in weekly EI payments. But if they worked part time while collecting EI, they could make as much as $779 per week (wages plus EI) before losing their entitlements completely.

Under the new temporary changes, local labour market conditions are largely irrelevant. Except for areas with exceptionally high unemployment rates (over 13.1%), EI is structured as follows:

  • Canadians can qualify for EI if they have worked 120 hours over the last 12 months (previously 420-700 hours, depending on the local unemployment rate)
  • If they qualify, their benefits can last for 26 weeks or more (up from 14 weeks) if they cannot find work
  • There is a minimum floor payment of $500/week, rising to $573 dollars using the same 55% formula described above.

Finally, there are a few features to EI that make it slightly stricter than CERB. People must reapply for EI every two weeks (instead of four under CERB), they must demonstrate that they are actively looking for work, they must accept a job if it is reasonable to do so, and the benefit is taxable upfront.

New Recovery Benefits

Canada Recovery Benefit

This new program is intended to capture those Canadians who do not qualify for EI—self-employed, contract, and gig workers, and those whose EI benefits have expired. Effectively, it works the same way as CERB did. Those who qualify will receive $500/week for up to 26 weeks, provided they meet the same basic conditions that were in place with CERB. The key differences between the CRB and CERB are in two areas: administration and the benefit clawback. On the administration side, the EI stipulations described above for re-application, job search, and tax treatment are also in place for CRB. As for the benefit clawback under CRB, Canadians will be allowed to earn up to $38,000 before their benefits start to be lowered—at the rate of 50 cents per dollar earned.

Canada Recovery Sickness Benefit

The Canada Recovery Sickness Benefit targets individuals who are sick or must self-isolate because of COVID; or who have underlying conditions that put them at increased susceptibility to COVID. It provides $500 per week for up to two weeks, although the proposed implementing legislation allows the government to easily increase that limit whenever it wants. Individuals can claim CRSB benefits any time over the next year until their two weeks runs out. They are eligible for CRSB payments if they are unable to work 50% of their normal work hours but cannot claim the benefit if they have access to sick leave from their employer, or if they are collecting EI or one of the other recovery supports.

Canada Recovery Caregiving Benefit

The Canada Recovery Caregiving Benefit is similar in structure, but broader in scope than the sickness benefit. It is intended to help Canadians who need to stay home to look after children or other dependents who are unable to go to school, day care, or similar programs because of COVID-related closures and limitations, high personal risk levels, or caregiver unavailability. Qualifying households receive $500 per week for up to 26 weeks (again, with an open window to extending the time limit). As with the CRSB, they are eligible if they are not collecting EI or other recovery supports, have no access to paid leave from work, and are unable to work 50% of their normal hours.

What’s good?

The new suite of income supports offer a number of benefits. Beginning with the EI program, the reduction in the number of qualifying hours will protect people who have been unable to find work and accumulate the necessary hours during the economic shutdown. It also ends some of the regional inequity that saw people in some parts of the country receive more generous benefits than those living elsewhere.

The CRB will help Canadians who slip through the cracks of EI. EI does not cover all self-employed, contract or gig workers (self-employed individuals could have opted in to EI, but many did not). This new program, like CERB, allows those individuals to receive temporary income supports that are roughly equivalent to EI.

Finally, and most importantly, the two sickness-related benefits (CRSB and CRCB) are designed specifically to help Canadians affected by COVID. Last May, BCA recommended to the federal government that a modified CERB program be extended on a limited-eligibility basis to support affected individuals. The idea was that when individuals contract COVID, need to quarantine, or need to care for infected/quarantined dependents, they should be able to do so and still receive some income support. That is exactly what these programs do.

What are the problems?

Disincentive for part-time workers to re-enter the workforce

The problems lie with the incentives created with EI and CRB. Because there is a minimum $500/week payment floor, many part-time or casual workers would be in a better financial position if they remain on those income supports than if they re-entered the workforce.

Source: Business Council of Alberta

For full time workers, this is not so much an issue: a minimum-wage full-time employee in Alberta earns $31,200 per year. Without work, this individual would make the equivalent of $26,000 per year (for 26 weeks) through EI. Once they find work, since this $26,000 is less than 90% of their previous income, they would earn slightly more money by working under the Working While on Claim rule because they could keep a small portion of their EI payments.

On the other hand, all but the highest-paid part-time workers will earn more not working and collecting EI than they would if they returned to work. Furthermore, the Working While on Claim provisions—which are intended to encourage a transition back to work—do not apply in any meaningful sense because, unless they find a new job that pays more than $500 per week, any amount they earn working will be less than what they were collecting under EI.

Source: Business Council of Alberta

Additionally, context matters: combining labour market uncertainty, health risks with being in public, and additional costs associated with work (transportation, clothing), it could easily make more sense for individuals to choose to remain on EI rather than find work. To be clear, this is not a laziness issue; it’s about people making rational choices given the options they have available.

The issue here is bad program design. Not only do these changes to EI discourage part-time workers, they could adversely affect the economic recovery. As businesses ramp up their operations, many are not in a financial (or demand) position to hire full-time workers. If EI creates a disincentive to accept part-time work, it could perversely create labour shortages in a time of high unemployment.

Inconsistent treatment of people on EI vs CRB

The second major problem with these new support programs is that people under EI are treated differently than those collecting CRB. This is specifically about the income claw back when people start to work while still collecting income supports. As described above, Working While on Claim provisions allow EI claimants to keep 50 cents of EI for every dollar they earn, up to 90% of their previous income.

Under CRB, the rules are considerably more generous. A person can earn up to $38,000 per year before losing a single dollar of CRB benefits. At that point, CRB payments are clawed back at a rate of 50 cents per dollar earned.

The differing impact is best illustrated with an example. Suppose two individuals worked full time earning $16/hour ($640/week) but then both lost their jobs. One went on EI, the other qualified for CRB. Both later returned to their jobs working part-time at half their regular hours. The individual collecting EI would see their benefits clawed back to the point where they would be making $576/week in total. However, the person on CRB faces no such limit; they would collect up to $820/week—more than they were making when they worked full time—even though both people are earning the same wage and working the same hours.

So, what would make it better?

What complicates these issues is that there are undoubtedly cases of individuals who, because of personal circumstances, were never able to work full-time and who are having trouble making ends meet. For those individuals, the EI/CRB payment floor and CRB claw back provisions are a welcome relief. But they do not represent most part-time workers. We need more nuanced program design that differentiates between those who need additional supports and those who simply find themselves better off staying home rather than working.

What might that program design look like?

For one thing, EI should not provide qualifying applicants with more than 100% of their previous earnings. That turns EI into a Universal Basic Income, which is far beyond the intended scope of the program.  

Second, people collecting CRB should not receive more generous claw back provisions when they go back to work than their counterparts on EI. This is especially true from a fairness perspective because most CRB recipients had not been paying employment insurance premiums but are now collecting more generous benefits.  

Finally, EI and CRB are insurance programs, not welfare; they are not the appropriate mechanisms for helping Canadians living in poverty. These instruments are far too blunt and capture too many people who are not actually poor. Enhanced child care supports, paid training/upskilling, more generous GST tax credits, increased Canada Child Benefit payments, or even a negative income tax are preferable, more targeted, options.

The current EI and recovery benefit programs are stopgap measures while the federal government develops a modernized Employment Insurance program. This new program needs to preserve the incentive for Canadians to find work by ensuring that no one is better off by avoiding a job. Poverty and barriers to labour force participation are better addressed through other government initiatives.

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