Ep.33: 5G on the Horizon
With Mirko Bibic
In mid-March, as millions of Canadians were asked to stop going to work and stay home to prevent the spread of the COVID-19 virus, the employment insurance (EI) system failed.
A parallel could be drawn with the example of American Insurance Group during the 2008 financial crisis — a large, complex and opaque operation that worked well enough, but was never designed to cope with the potential of so many claims arriving at once.
EI failed in at least two important ways. First, it failed to cover enough of the Canadian workforce that experienced sudden furlough, lay-offs or a significant drop in paid hours. By April, a little more than one third of all workers in Canada were unemployed, including those not looking for work during the shutdowns, and those who were employed, but had lost all or the majority of their paid hours. Second, it failed administratively to keep up with a sudden surge in applications for benefits. As the minister responsible for the program later testified, best estimates on processing times for the millions of claims received ran as long as 18 months.
Each of these is reviewed in more detail and directions for policy reform that could avoid the same catastrophic failure in case of a similar emergency are proposed. But, more important, these same changes might better equip the system to respond to the myriad personal and micro-economic emergencies that happen every day and are the policy reasons for why working Canadians need wage insurance in the first place.
EI is Canada’s primary social-insurance program for working-age adults. It was originally launched in 1940 as a contributory insurance program for what policy-makers seem to have conceived of as blue-collar workers on and off the job with the same employer. The program’s roots date even further back, to the 1919 Royal Commission on Industrial Relations (the Mathers Commission), which recommended a federal program of “State Social Insurance for those who, through no fault of their own, are unable to work . . . . Such insurance would remove the spectre of fear which now haunts the wage earner.”
That report also offered a recognition that some workers, in non-standard jobs, were especially at risk of unpredictable losses to their income and being left “without the means of subsistence.”
Social insurance is meant to provide protection against social risks, that is risks whose full costs ripple beyond those directly affected. There is no real incentive for private markets to offer insurance products for such risks, but there is a strong efficiency case for governments to create programs that pool resources for management and mitigation strategies.
In normal times, roughly 80 percent of the Canadian workforce is notionally covered by the program — meaning they are paying insurance premiums and accumulating insurable hours of employment that could be used to qualify for regular benefits in cases of involuntary job loss, or special benefits in cases of temporary unpaid leaves from paid work for illness or caregiving. Before COVID hit, there were approximately 1.1 million Canadians who were unemployed, but among those, only 460,000 (42 percent) received regular EI benefits.
The fact that only a minority of unemployed Canadians usually receives EI is neither new nor newsworthy. Policymakers have known for a long time that an important share of the workforce is paying into an insurance pool from which it cannot ever draw a benefit.
Previous research looking at special EI benefits paid to new parents finds a very similar pattern of a share of workers contributing into the common social fund and unable to qualify for help when they need it. In 2014, one in five new mothers had been working, but were not able to collect maternity or parental benefits and one in 10 had been paying EI premiums, but didn’t get maternity benefits. This was still true in 2018 when nine percent of new mothers had paid premiums, but didn’t get benefits. What’s worse is that access to maternity benefits rises with family income so that low-income families who have paid into the system are less likely to see any benefits when they need them.
A basic principle of social insurance is a wide pooling of resources to fund assistance (either directly through contributions or indirectly through general revenues) tempered by specific criteria for drawing benefits. But it is difficult to imagine that massive economic shutdowns and layoffs, as we’ve seen with this once-in-a-century pandemic, would not meet the criteria for benefits in any well-functioning social-insurance system. And yet, of the 8.2 million Canadians who have received assistance from the Canada Emergency Response Benefit (CERB), the cash benefit put in place in lieu of employment insurance, half appear, on preliminary screening, to not have been covered by EI. In the best of times, with record low unemployment, the EI system covered 80 percent of the workforce, but paid benefits to less than half of workers experiencing unemployment. At the worst of times, during COVID, a policy response based on EI coverage alone would have left out a significant share of Canadians needing help in a crisis.
Not only did CERB have to dramatically increase the share of workers who were covered, but it also had to take a significantly more flexible approach to defining the eligible circumstances under which a worker would be paid benefits. The COVID-related shutdowns and ripple effects have led to absences due to self-isolation or illness, temporary furloughs, permanent layoffs, reductions in paid hours of work, voluntary unpaid leaves of absence from work, reduced opportunities to seek work and reduced opportunities to earn self-employment income.
Under regular EI rules, many of these types of employment separations or reductions would be ineligible for special or regular benefits even if an applicant had contributed to the insurance fund and met the minimum insurable hours to qualify. In fact, pre-COVID, among those Canadians who contributed premiums to EI and became unemployed, 25 percent were found to have had reasons for becoming unemployed that were not valid for receiving benefits.
In proving the validity of their claim, a worker may be at the mercy of a former employer and the judgment of a claims process that is difficult to scrutinize. When an employee ceases working, employers are required to submit a record of employment to the EI program, a form that summarizes a worker’s recent earnings and employment history as well as the reason the employment was terminated. Employers and employees may disagree on the facts of why employment ended. In these cases, the financial risk is on the employee who no longer has employment income and now faces a significant hurdle in accessing insurance benefits for which they have contributed. There is not, in fact, always a bright line between “quit” and “fired.”
In principle, the EI system recognizes that even quitting may be out of a worker’s control. For example, EI regular benefits can be paid in cases when an employee is no longer able to work because they have lost their childcare. An employer who uses code “E10 — Quit /Care for a dependent” may reduce some of the administrative obstacles facing a former employee forced to stop working when their childcare fell through, but an employer who uses the standard “E00 — Quit” may send that same former employee into the EI wilderness. What’s more, claimants are expected to prove they took extraordinary steps to preserve their employment, such as seeking changes to their work schedule, considering an unpaid leave until a solution could be found, or even asking friends and family to provide childcare. Readers will immediately recognize the near impossibility of proving such efforts in the current circumstances. COVID-19 has meant mass shutdowns to child care and public-education systems, and uncertainty about capacity or sustainability of re-opening efforts to those same services. Constraints in access to childcare or interruptions in public education services are not entirely new phenomena in 2020. There’s also everything from ice storms to labour interruptions.
Either way, the EI system has only truly recognized unpaid caregiving as a valid reason for job separation in the first 12 or 18 months of a child’s life or in the awful circumstances of a life-threatening illness in a child. Other systems of social insurance have been able to find far more flexible and responsive ways to provide support to parents and caregivers of infants, toddlers and even school-aged children who must take time away from paid work. Even if amendments were made to cover more workers and to make it easier to meet the labour force attachment test imposed by EI, many Canadians who lost paid work would not be eligible for benefits without a more significant re-definition of the kinds of social risks that EI is legally able and intended to cover.
I’ve written elsewhere that the federal response on income support during the spring of 2020 is not a story of sudden policy innovation to replace traditional EI with a new benefit. Instead, it is a story of incremental policy changes that tried first, and modestly, to make EI better fit the new circumstances. When it became clear, because of the sheer volume of claims, that the EI processing system would be paralyzed, CERB was introduced as a temporary fix — a way to get income support to the millions of Canadians in need by dramatically reducing and redistributing the administrative load on the back-end IT systems that run EI.
The majority (73 percent) of the 2.8 million new or renewed claims handled by the EI system in a normal year run through a fully or partially automated system. This is made possible by having the overwhelming majority (99 percent) of EI claimants file their claims online. When the information is submitted online, and particularly, when it can be linked to other administrative data — such as an electronic record of employment, the social-insurance number registry or even tax records — government systems can be designed to more quickly complete various tasks in determining eligibility and benefit levels. When program parameters are stable and claim volume is modest, ESDC reports that the average claim takes 19 days to process. But this figure includes only those workers covered by EI, who have an eligible reason to claim benefits and meet the program eligibility test of recent labour-market attachment. Any policy reform that increases the eligible population and the range of reasons that benefits can be claimed will necessarily increase overall claim volume and, accordingly, pressures on the administrative back-end system.
And that system is built on a 60-year-old programming language. The fitness and ability of EI’s administrative and technological back end is an important question that seems to have been almost completely overlooked in past reports and analyses. Are they still fit for purpose and can they adequately respond to new demands in volume?
A 2016 evaluation of the program concluded that “the absence of sufficient investments in technology to support EI processing, combined with reduced budgets and an increasingly complex operating environment limited the department’s ability to fully realize the potential benefits of the automation and modernization agenda. The same evaluation noted that, while 19 days might be the average wait for a first benefit payment, there has been a recent increase in the number of claims waiting 28 days or longer.
The system has seen cost savings from back-end investments to streamline or automate application review and benefit calculation. According to one estimate, Ottawa’s mean administrative cost per claim fell 10 percent (from $66.60 to $59.88) between 2008-09 and 2011-12.
The scale of the challenge, and the potential opportunity for modernization, is illustrated by the fact that EI runs on COBOL, a programming language first developed in 1959. It is robust, but very old. Complex changes to program parameters in response to policy changes can take considerable time and COBOL programming is specialized and increasingly rare knowledge.
During the spring of 2020, the EI system faced a double imperative. It had to make payments to millions more Canadians than usually submit a claim in an entire year, and second, to deliver that money quickly. There was no existing system or database to help the government proactively identify individual Canadians and send them a payment, even if the principles of social insurance were relaxed in favour of a universal lump-sum amount. Canada is not alone in lacking detailed and current information about its own population. The United States did aim to make a universal and flat payment to all American adults by using 2018 personal income tax records. But that approach resulted in other kinds of errors and gaps in coverage. According to the U.S. Government Accountability Office, nearly (US)$1.4 billion in relief cheques has been paid to deceased persons. Furthermore, in early June, the House Ways and Means Committee reported that as many as 35 million living Americans were still waiting for their universal relief payments. This illustrates the imperative of having valid and reliable administrative records to inform benefits programs’ design and implementation, even when the program has the broadest possible eligibility criteria.
In Canada, the government’s solution to the task of paying a lot of people money and quickly, was to drastically simplify the usual EI program rules. All claimants would receive the same amount of money and no adjustments to benefit amounts would be made within a claim period in response to a claimant’s other sources of income. For most EI claimants, the calculation of payment amounts can usually be handled by an automated stage in the claims process, but this presumes a modest volume of claims and limited variation in the benefit amounts to be paid. Furthermore, the government needed to distribute the volume of claims so that an important share could be handled and processed by the Canada Revenue Agency, rather than being managed solely within the outdated EI system itself. On the simple metric of capacity to pay many millions of Canadians and quickly, the EI system, as it operates during normal times, failed during COVID.
The coronavirus has created massive disruptions to nearly every aspect of Canadian life — whether and how we work for pay, the distribution of care for children and other dependent family members, the risk of illness and our collective obligation to avoid spreading infection, even if it means forgoing income. The risks of interrupted work income have become much greater for a wide range of reasons, many not well-recognized under our main social-insurance system for working-age adults. None of these social risks is actually unique to or the sole result of COVID. These were risks borne by many Canadian workers and their families before COVID, risks that will continue after it is finally gone. But these risks have become suddenly and simultaneously more visible among a larger share of the population.
I am going to avoid the thorny questions surrounding the future of the Canada labour market, of work in general and economy. I do not know whether COVID is going to lead to an increase in precarious employment, or if labour shortages will increase worker bargaining power. I would prefer not to speculate. Instead, I’ll conclude with a few ideas, rooted in this paper’s analysis earlier analysis about the EI system we might have wanted to have heading into March 2020. This may inform, as we start to understand the “new normal” in our labour market and economy more generally, the debate about future directions for income support and social insurance in Canada.
Consulting Partner: Deloitte
Federal Government Partner: Government of Canada
Provincial Government Partners:
Foundation Partners: Metcalf Foundation
PPF would like to acknowledge that the views and opinions expressed in this article are those of the author(s) and do not necessarily reflect those of the project’s partners.