Thursday, May 30, 2013

What is an equitable maximum insured earnings level?

My last post on maximum insurable earnings for workers’ compensation coverage generated a lot of email and questions.  Several people had responses like this one:

“…it does not appear that you addressed the root question of whether or not WCB adequately compensates high earners.  Rather, you imply that, as we are operating in a similar manner as everyone else, we must then be providing adequate compensation.  Just because everyone operates in a certain manner does not mean that said practice is a good practice.”

This is a fair point.  The blog post focused on practice and did not really address what would be “adequate” or qualify as “good practice”.  There are, however, some serious difficulties in coming to a judgment about what an equitable maximum insured ought to be.

Although WorkSafeBC's maximum insured earnings is similar to many other workers' compensation systems, it is higher than most US jurisdictions but lower than the insured earnings in Ontario, Alberta, Manitoba and at least some Australian schemes.  Without an agreement on what the maximum ought to be, it is hard to judge the adequacy of any particular jurisdiction.

I note that section 37 of Saskatchewan’s new Workers’ Compensation Act provides for the long-standing maximum of $55,000 per year to be raised to $59,000 per year with provisions for increases until the maximum is “equal to 165% of the product of the average weekly wage and 52.”  Why 165%?  The Committee of Review in 2006 had recommended the maximum be “not less than 165% of the “average annual wage” rounded to the nearest $100.”  Ontario’s workers’ compensation legislation in section 38(1)(c)sets the maximum at 175 per cent of the average industrial wage for Ontario.  Why 175%?  I’m not clear on why this particular percentage was chosen but it appears to be an effort to ensure a higher proportion of upper-level earners are fully covered.

British Columbia’s Workers Compensation Act uses a formula in Section 33.  A Board Minute sets the maximum for 2013 at $75,700 using the formula.  That is about 169% of the 2012 average industrial aggregate wage as reported by Statistics Canada. Is this equitable?  The last Royal Commission on Workers’ Compensation in British Columbia examined the current formula and made the following recommendation:

“[Recommendation]  … 139. the maximum wage rate under Section 33(1) and (6) of the Workers Compensation Act be adjusted annually to an amount equal to two hundred percent of the average industrial wage in British Columbia for the twelve month period immediately preceding the adjustment.”

Why 200%? In its discussion, the Royal Commissioners cite “fairness” and included a quote from a background paper prepared for the United States National Commission on State Workmen’s Compensation Laws, [John F. Burton Jr.,  1972]:

“To be equitable, the program must treat all workers fairly. According to one concept of fairness, most workers should have the same proportion of their wages replaced. However, a worker with a low wage may need a higher proportion of his lost wage in order to sustain himself and his family. … A high income worker who can afford to purchase private individual protection may have his weekly benefit limited to some reasonable maximum.”

Sir William Meredith’s 1913 final report to the Ontario government, which is the foundational document for workers’ compensation in Canada, made only one oblique comment in his narrative regarding the maximum.  He writes:

"...there is no reason why highly paid managers and superintendents of establishments should be entitled to compensation out of the accident fund to an amount greater than the highest paid wage earner would be entitled to receive.”  

The "highest wage earner"  is likely to have a unique earnings level in each province.  The intent, however, appears similar to the National Commission’s intent:  cover all earnings for all workers except for the very highest earners.

In the absence of any authoritative absolute statement on where to draw the line, an appropriate test of adequacy of earnings coverage in any jurisdiction might be to identify the proportion of the employed labour force with earnings below, say, the 90th percentile of earnings from employment.  The 90th percentile could be calculated from a number of potential sources from standardized surveys to actual tax returns. It has the advantage of being applicable regardless of the how skewed or splayed the distribution of earners might be without actually determining specific occupational roles.

Perhaps you have a better way or think the idea of a maximum insurable is outmoded.  Feel free to add your own comments and ideas.