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There has to be a better way of financing Employment Insurance (EI), one of Canada's most important income security programs.

In principle, EI is a social insurance program financed by employer and employee premiums rather than from general tax revenues.

That is as it should be since only employees qualify for benefits, and since both contributions and benefits are related to the level of individual earnings, up to a maximum based upon average earnings.

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Most economists agree that the program is basically financed by workers, since the employer premium is largely shifted to labour (though part of the cost of unexpected premium increases will be borne by employers).

While the principle that the EI program should be largely self-financing is widely endorsed and has been enshrined in legislation, in reality the premium rate and benefits are set by the federal government, and program revenues and costs are part and parcel of the federal budget and public accounts as a whole.

Notoriously, running a surplus of EI premiums over benefits was a major part of the deficit and debt reduction strategy of the Chrétien Liberal government.

Major cuts to benefits in the mid-1990s (higher eligibility requirements; reduced benefit periods; a decade-long freeze to the maximum weekly benefit) produced an accumulated EI surplus of $57-billion by 2009. This lowered the total federal debt by that amount.

The Harper Conservatives promised to end this abuse of EI as a fiscal cash cow, and even set up an independent premium-setting mechanism in the form of the Canada Employment Insurance Financing Board. However, to cut a long and tangled story short, the federal government ended up unilaterally setting premium rates, as it retained the power to do, and formally abolished the board in 2013.

Due to the recession and a number of years in which EI benefits significantly exceeded EI premiums, a large deficit accumulated in the "new" EI Fund, which was launched in 2009 when the "old" EI Fund with a surplus of $57-billion was eliminated. This "new" accumulated deficit stood at $8.1-billion in 2012-13, according to the last federal budget.

The federal government has frozen EI premiums for the three years, 2014 through 2016, which will result in the fund reaching balance in 2015-16 and then accumulating a new surplus of $6.4-billion in 2016-17.

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As many fiscal policy experts such as the Parliamentary Budget Office have pointed out, the federal government is eliminating the overall federal deficit faster than would otherwise be the case by once again running annual surpluses in the EI account.

And, as social movement critics have been quick to underline, the current EI surplus is partly the result of a record-low proportion of unemployed workers actually managing to qualify for benefits as long-term unemployment has ratcheted up, as temporary jobs increase, as a greater proportion of the unemployed are new entrants to the labour market, and as the government toughens up work search rules for claimants.

Seen from this perspective, the EI surplus is being paid for by workers twice: first as premium payers, and second as potential beneficiaries.

In fairness to the Harper government, it says that it will balance the EI account over seven years starting in 2017, which would translate into a significant premium cut. But, in the here and now, they are doing what the Chrétien government did by running an EI surplus to reduce the overall deficit.

It is hard to stick rigidly to the principle that the EI program should be self-financing over time.

In periods of high unemployment, such as that experienced during and immediately after the Great Recession, we want benefits to increase to cushion the impact of unemployment on families, and to stabilize the economy, especially in hard-hit communities. Recessions are also the worst time to raise premiums.

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The large deficit incurred in the EI account was a key ingredient in Canada's economic recovery in 2009 and 2010, and the Harper government should be commended for increasing the generosity of the program in tough times without raising premiums.

In periods of still incomplete recovery, such as today, it is not desirable to be raising premiums from a macroeconomic perspective.

One possible answer to the question of how to finance EI is to return to the policy in place back in the 1970s. At that time, the federal government explicitly covered any additional costs of the program that resulted from a period of exceptionally high unemployment.

Along those lines, the premium rate today could be set to cover all program costs at a "normal" unemployment rate of, say 6 per cent. (Better, we should improve access to and the level of benefits and increase premiums as needed to do so.)

The key point is that EI finances should be based upon some principle that trumps the immediate fiscal pressures facing the federal finance minister of the moment.

Andrew Jackson is the former Packer Professor at York University and senior policy adviser to the Broadbent Insitute.

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