CERB: From Emergency to Recovery*

Luc Godbout, Université de Sherbrooke

* This text, originally in French, is current as of August 24, 2020. The author would like to thank the Research Chair in Taxation and Public Finance of the Université de Sherbrooke for the financial support that helped make this study possible. The author would also like to thank Tommy Gagné-Dubé, Louis Lévesque, and Suzie St-Cerny for reviewing the text and making comments and suggestions. Any misinterpretations are his own.

In response to the pandemic, the federal government announced the introduction of a benefit that will forever be part of Canadian public policy history: the Canada emergency response benefit (CERB). This analysis seeks to draw some lessons from the CERB experience.

But before proceeding with any analysis, evaluation, or criticism, it is worth underscoring the colossal work done by the public servants who had to develop new public policies in the midst of a crisis. Let us also recognize that the CERB constituted emergency assistance, as its name suggests. Its purpose was to provide economic support to the millions of Canadians left unemployed by the COVID-19 crisis. Its initial goal was to prevent financial distress for as many people as possible—a noble goal that was generally achieved.

Writing an article on the CERB while it was constantly evolving was a challenge in itself: after the initial draft, the text had to be revised several times, to keep up with the government's changes, until the final announcement scheduling an end to the CERB on September 27, 2020.

Origin and Parameters

From the outset of the pandemic, concerns were expressed about whether the employment insurance (EI) computer and administrative systems could deliver benefits quickly to so many newly unemployed people. The federal government quickly began looking for alternatives. On March 18, it announced the creation of the emergency care benefit and the emergency support benefit, two measures that were to be delivered by the CRA to complement EI.

Barely a week later, the federal government cancelled these measures and introduced the CERB, available through either the CRA or Service Canada, depending on the applicant's situation. Initially, the CERB offered a taxable amount of $500 per week for up to 16 weeks to workers who had more than $5,000 in earned income in the previous year and who stopped working for COVID-19-related reasons. Clearly, the pressure to deliver assistance quickly meant keeping eligibility criteria very simple and using the CRA as a delivery agency for those who did not qualify for EI. In creating the CERB, Canada differed from most OECD countries, which instead opted to expand their existing EI programs.

The CERB Instead of EI

The CERB was established retroactively to March 15. This meant that applications for anyone who lost their job on or after March 15 were processed under CERB criteria, even if they were eligible for EI. Again, this choice was probably made to avoid clogging up the EI computer and administrative systems. Exit the initial goal of providing parameters comparable to EI. The simplicity of providing a flat $500 weekly amount eliminated the proportionality between the income lost and the benefits received for recipients otherwise eligible for EI: those with higher incomes were limited to $500 per week when they could have received up to $573 per week if they had lost their jobs before March 15; conversely, lower wage earners would have received less in EI.

For some, such as full-time students working part-time, the eligibility criteria for the CERB appeared to be easier to meet than those for EI. Of course, young workers (25 and under) were in more precarious sectors, but they are overrepresented among CERB beneficiaries.

Also note that for CERB benefits, unlike EI regular benefits, there were no criteria related to being ready to work and looking for a job. In a lockdown context, the requirement to be looking for work made no sense, but once the economy reopened, this EI criterion remained absent from the CERB.

CERB Expansion

After the implementation of the CERB, political pressure led to a series of expansions. Initially, an individual was required to have no work income in order to receive the CERB. In order not to penalize certain beneficiaries, such as a self-employed person responding to emergencies or a person who had lost a main job but still had a secondary job, the criterion was broadened by allowing beneficiaries up to $1,000 per month in earnings while they were receiving the CERB. This provision illustrates once again a major difference between the CERB rules and the mechanism that applies to EI recipients earning employment income. Under the CERB, the benefit was lost entirely as soon as the beneficiary's monthly working income exceeded $1,000. Under EI, the phaseout is roughly 50 cents per dollar of earned income.

The owners of small and medium-sized enterprises who had chosen to pay themselves in the form of dividends rather than salaries also had their concerns addressed. Initially, they were not eligible for the CERB if they did not have earned income. A change was made to allow dividends to be included in income to meet the $5,000 earnings requirement. Next, beneficiaries who had exhausted their regular EI benefits and who could not find employment during COVID-19 also became eligible for the CERB.

However, not all groups in society who did not meet the criteria had the privilege of having their concerns addressed. For example, people who had recently started a job after leaving social assistance remained ineligible for the CERB if they had not yet earned $5,000, even if they actually lost a job because of COVID-19.

After the CERB

On August 20, 2020, the government of Canada unveiled how the CERB would end. After a final four-week extension to September 27, with the maximum enrolment period expanded to 28 weeks and all other parameters unchanged, a transition will be made from the CERB to the "simplified EI" (SEI) system or to one of the three new benefits: the Canada recovery benefit (CRB), the Canada recovery sickness benefit, and the Canada recovery caregiving benefit.

The SEI Program

To assist in transitioning the majority of CERB recipients to EI, the federal government announced that an SEI program would apply as of September 27, 2020. The government has significantly reduced the number of hours of work required to qualify for SEI by introducing a one-year credit of insurable hours that varies according to the type of benefit. This means that claimants have to work only 120 hours to qualify for benefits.

Although the proportionality of benefits to lost income is restored in SEI, a base level of $400 per week has been established for claimants of regular SEI benefits. For the rest, the usual EI criteria will be used to determine eligibility. These SEI benefits are available for at least 26 weeks, but if claimants qualify for more, they will get more. As with the CERB or EI, SEI benefits are taxable.

Three New Benefits

As part of transitioning CERB recipients to other programs, the government is creating three new taxable benefits for people who do not qualify for SEI:

  1. The CRB provides a single payment of $400 per week for up to 26 weeks to workers who do not qualify for SEI—primarily self-employed people. To obtain the CRB, workers must certify that they meet the criteria, are looking for a job, and will accept a job when it is reasonable to do so. Applicants will be required to repay some or all of the benefit if their annual net income (excluding the CRB) is greater than $38,000. In these last three elements, the CRB differs from the CERB.
  2. The Canada recovery sickness benefit concerns workers, whether salaried or self-employed, who are unable to work because they are sick or have had to self-isolate because of COVID-19. They are eligible for a benefit of $500 per week for up to two weeks.
  3. The Canada recovery caregiving benefit of $500 per week for up to 26 weeks is targeted at households where at least one member is unable to work because of a need to care for a relative (a child under 12 years of age or a family member with a disability).

Incentive To Work

In addition to supporting households financially during the pandemic, the government needs to consider the effect of the CERB on the incentive to work. The simplicity of the parameters adopted meant that some households received more from the CERB than the work income they had lost. This situation may have led some workers to prefer the CERB over wages. On the one hand, some have argued that low wages are the real problem behind the disincentive to work, but, on the other hand, the disincentive effect of the CERB on workers receiving it appeared to be very real.

Not surprisingly, it was calculated that it was more profitable to receive the CERB than to work for minimum wage, in both Quebec and Ontario. For example, a single person who continued working for minimum wage and who was therefore not entitled to the CERB would have less disposable income in 2020 in Quebec and Ontario than if the individual had been laid off and received the CERB.

To counter the "CERB effect," the Quebec government created the incentive program to retain essential workers (IPREW). In simple terms, this program provided a taxable benefit of $100 per week to low-income earners working in essential services. To be eligible, gross wages had to be $550 or less per week and annual employment income had to be between $5,000 and $28,600 before the benefit. This benefit was paid retroactively to March 15, for a maximum of 16 weeks (and, unlike the CERB, it was not extended). The IPREW turned the financial disadvantage of working into a slight advantage for its recipients.

Although the federal government seemed to be aware of the "incentive to work" issue and announced that it would make efforts to ensure that it was offering the CERB while encouraging employment in all circumstances, nothing was done in this regard. An opportunity to correct the situation was clearly missed when, on June 16, the extension of the CERB from 16 to 24 weeks' duration was announced.

The CERB's Cost and Interactions

Initially, the CERB was expected to cost $24 billion. By August 16, nearly 8.6 million individual claimants had received $70 billion. It is now projected that the cost of the CERB—available for up to 28 weeks—will be $88 billion.

Once the two flagship programs (the CERB and the Canada emergency wage subsidy [CEWS]) were implemented, the federal government expressed its desire to transfer CERB recipients to the CEWS and EI. These programs remain almost co-dependent: without one, there would be more beneficiaries under the others.

More broadly, disbursements related to the federal constitutional responsibility for EI are rising sharply. Although EI benefits amounted to $20.1 billion in 2019-20, the combination of EI, SEI, the CERB, the CEWS, and the three recovery benefits will cost more than 10 times that amount in 2020-21.

A Prelude to a GMI?

Some say that the CERB has acted as, among other things, a pilot project on the appropriateness of a guaranteed minimum income (GMI). The CERB has rekindled discussion of a GMI, but this renewed consideration must take into account a number of factors, including the fact that the two benefits differ widely in their respective eligibility criteria. That said, the parliamentary budget officer has estimated the cost of introducing a maximum monthly GMI benefit for Canadians aged 18 to 64 of $1,527 for singles and $2,160 for couples. In a scenario where the GMI is reduced by 50 cents for every dollar earned, 9.6 million Canadians would have received it at an estimated gross cost of $45.8 billion over six months (a period comparable to the CERB's 24 or 28 weeks). According to these benchmarks, the GMI benefit, compared with the CERB, would have been offered at lower cost and to more individuals, but with lower monthly amounts being provided. Apart from the monthly value of the GMI, however, the main difference is its progressive reduction, which appears to be more neutral than the CERB in terms of providing a financial incentive to work.

Learning from the CERB Experience

The CERB is a large-scale public policy experiment. The government must learn from this experiment to ensure that it does better next time, even if only for a second wave of the virus. In the future, what will be the best way to provide financial support to households? The following, without being exhaustive, offers some food for thought:

  • With many applications expected and with rapid assistance clearly desired, the federal government turned, in part, to the CRA to manage the CERB. From this perspective, the CRA "delivered the goods." As many had been pointing out since the spring, it was up to the government to make the necessary adjustments (which it finally did after several months) to transition beneficiaries from the CERB to SEI and the three new economic recovery benefits.
  • From a macroeconomic point of view, the rapid creation of the CERB met the need for income replacement well, but it had unintended effects on the incentive to work. For example, the CERB included eligibility criteria that allowed certain groups with no significant shortfall, such as young people living with their parents or part-time workers, to qualify and even to receive more than their lost employment income. The design of a financial support policy must ensure that working provides greater financial gain in all circumstances. Yet the government, despite its statements in this regard, never adjusted the CERB to reduce its negative effects on the incentive to work. It is the transfer of beneficiaries to SEI that addresses this irritant.
  • Although the EI system's weakness—that is, its not allowing for more flexibility or for the expansion of the existing program—forced the creation of the CERB, the government, once the crisis was over, worked on transitioning its beneficiaries to the CEWS and EI. The CERB has proved to be more popular than the CEWS; we must try to understand why. In addition, the EI system needs to be redesigned so that its eligibility criteria can evolve in response to economic and labour market conditions, enabling it, where necessary, to take the place of the CERB. This point seems to have been heard, since SEI and the three new recovery benefits were created during the drafting of this article.
  • Although the government had to act quickly in the face of the crisis—which it did—it is imperative that there be audits and accountability to ensure that the money went where it was supposed to go.
  • It is essential that a detailed assessment of the CERB's impacts, especially its cost and work incentive issues, be undertaken to inform future decisions, particularly with respect to proposals to establish a GMI.
  • Another phenomenon arising from the CERB's simple parameters is that, unlike many federal government benefits, the benefit provides no family income criteria or mechanisms for its repayment by high-income earners when they file their income tax returns. The income-tested repayment of the benefit could apply only with SEI and the CRB.
  • Finally, the economic recovery may be slow. It seems crucial that in the case of persistent unemployment, the government develop training support for claimants. The societal effects of such an approach could only be positive.

Although the CERB played its part in the emergency, it was time, after two extensions, for this major public policy to be adjusted to minimize its potentially negative impacts. This adjustment was all the more important, given the high risk that a new wave of the pandemic will require ongoing income support programs.

Perspectives on Tax Law & Policy
Volume 1, Number 3, September 2020
©2020, Canadian Tax Foundation