Rethinking Employment Insurance: The Case for Funding Employment Insurance Out of General Revenues

Abstract

In recent years, the federal government has been criticized because they collected more in Employment Insurance premiums than was paid out in benefits and using the surplus for non-Employment Insurance purposes. The commingling of Employment Insurance premiums and general revenue funds is an issue only because Employment Insurance is funded through "premiums". Employment Insurance is a thought of as a form of social insurance, which would make it appropriate to finance it by collecting premiums. However, if Employment Insurance was not a social insurance program, the appropriateness of financing it through premiums would be in question. In this paper, I will argue that Employment Insurance has lost much of its insurance character and should be financed out of general revenues.

The first section of this paper will look at the current design of the Employment Insurance program. The second section will look at the reasons why Employment Insurance has been funded through Employment Insurance premiums. The third section will examine the tax policy issues surrounding the Employment Insurance premiums. The fourth section will present alternative methods to funding Employment Insurance and examine the tax policy issues surrounding them. The final section will discuss the future of the Employment Insurance program and the prospects for reform.

Keywords: Employment Insurance, Payroll Tax, Benefit-Linked Payroll Tax, Canada

JEL Classification: K34, E62, H24, H55