The latest rumor of the upcoming federal budget is that John Manley, the Minister of Finance, will transform the Employment Insurance Fund into a pay as you go system. Apparently, the problem with the current system is that premiums have been excessively high which has lead to surpluses in the Employment Insurance Fund, not to mention the undue burden on businesses. Currently, the Employment Insurance Fund has an accumulated surplus of $45 billion on its books, which apparently is nowhere to be found. Mr. Manley, as part of the reform, is expected to concede that the surplus has in fact been spilled over into general revenues.

So yet again the federal government is busy setting the record straight. Last week it was clarifying how much it contributes to our health care system, this week it’s explaining the surplus, or lack thereof, in the Employment Insurance fund.

Whether there is, or is not, a surplus in the Employment Insurance Fund is of little concern. What Canada needs is true reform in the way it handles its social security programs, namely pensions and employment insurance. Unfortunately, another pay as you go social program is a bad idea. We already have our hands full with the Canada and Quebec Pension Plans, Old Age Security, and Medicare.

There is hope however. Just follow your compass south and have a look at Chile’s amazingly successful privatized social security program.

Chile has been a world leader in social security reform. Little over twenty years ago Chile ditched its national pension system and opted to make individuals, yes individuals, responsible for their own retirements. They understood the flaws of pay as you go systems and instituted compulsory, individually owned, retirement accounts.

Each Chilean worker pays between minimum of 10 percent and a maximum of 20 percent of their wages into their own pension accounts managed by private institutions. Workers are free to change companies that manage their accounts, which creates competition among companies to provide higher returns and lower fees. Contributions are deducted from taxable income and returns are untaxed. Upon retirement, workers transform their individual accounts into an annuity with a private insurance company. They can shop around to find an insurance company that best meets their individual and family needs.

In 2002, Chile again broke away from the rest of the world and became the first country to expand the idea of individual accounts to their unemployment insurance system. Chilean workers pay 0.6 percent of their wages into their own individual accounts while employer contributions of 2.4 percent get divided between individual accounts and a joint employment insurance account. Funds in the individual accounts are administered by the same private pension funds that manage Chileans worker’s retirement accounts.

Chileans can draw on their accounts only if they are unemployed or retire. Once they exhaust the funds in their own accounts, they can apply for benefits from the joint account. Unlike Canada’s EI system Chileans can draw funds even if they quit or are fired from their jobs.

Upon retirement remaining funds in their individual employment insurance accounts get transferred into their individual pension accounts. This of course provides the incentive to find work in order to maximum the amount in their accounts at retirement, something Canada’s system does not provide. Allowing workers to draw funds if they quit or are fired saves the significant administration costs of determining whether or not a worker qualifies for benefits. In addition, it creates more a more flexible labour market.

While Ottawa refuses to reform the programs it controls, we’ve already seen the great achievements of program improvements in provinces like Alberta, Ontario and British Columbia. Imaginative reforms and the willingness to experiment do reduce the burdens of traditional government social programs. The lesson from Chile is clear -- individually owned, privately managed, retirement and employment insurance accounts work. We need Mr. Manley to put aside the status quo and be willing to engage in real reform.