Can unemployment insurance work in Singapore?

The Pros and Cons of Unemployment Insurance
The Pros and Cons of Unemployment Insurance in Singapore

For every scheme, there are benefits and drawbacks.

The Workers’ Party (WP) released a proposal to implement unemployment insurance in Singapore and so has the Singapore Democratic Party (SDP). This topic, however, is not new. NTUC Labour MP Patrick Tay spoke about unemployment insurance during his speech in Parliament in 2014 and brought it up again in Parliament earlier this year.

The key difference between the proposals put forth by the two opposition parties?

WP’s proposal is wayyyy more conservative, at $1.90 contribution a month by each worker and employer. It will be a 6-month payout, capped at 40% of the worker’s last drawn salary.

SDP’s proposal is quite different. It requires a huge contribution by the state (80%) and the remaining 20% from employers and workers. The payout period is for 18 months.

We can ignore SDP’s proposal for now because the cost of setting it up is wayyyy too high. $2 billion a year. Not very feasible.

That leaves us with WP’s proposal.

Before we are quick to dismiss it, let’s weigh the pros and cons and look at it objectively.

6-month payout period

Benefit

Granted, this sounds like a reasonable period to upskill/reskill yourself and find suitable employment without being “forced” to take up a ill-fitting job that doesn’t do good to yourself and the employer.

If it’s a really bad fit, you’re likely to resign sooner or later. It will also affect the company’s productivity after all the time they’ve spent on training you for the job. So having the 6 months to find a good job fit is not a bad idea after all.

Drawback

Will companies will find it harder to fill vacancies when people take their time to find a job? Some industries are already facing manpower shortage – will companies be forced to wind down when they can’t hire people?

In America, some firms were struggling to fill positions despite high unemployment. When there was a 9.5% jobless rate in 2010, employers and economists attributed unemployment benefits as one of the main culprits behind the hiring difficulties.

Some workers were going through the necessary motions (such as showing that they were actively seeking jobs) to collect their benefits. Some workers admitted that they were less likely to take whatever job that floated along, especially when it didn’t match up to the amount of unemployment benefits they received.

Will unemployment insurance in Singapore breed more complacency or reduce more cases of jobs mismatch?

Some form of safety net for middle-class workers

Benefit

There are existing relief schemes for retrenched low-wage workers who really need help making ends meet. But many workers in small and medium enterprises (SMEs) don’t have a safety net to fall back on.

They don’t earn less enough to qualify for financial assistance and SMEs usually don’t provide retrenchment benefits. If you’re wondering how big is this pool of workers, they form 70% of our workforce.

Unemployment insurance in Singapore will provide a peace of mind for workers to look for jobs without worrying about paying their next bill or buying a few more tins of milk powder for their babies.

They don’t have to resort to borrowing from loan sharks anymore. Hopefully loan sharks would eventually go out of business.

Drawback

That brings us to the next question. Will this discourage people from saving for unexpected events such as losing their jobs?

Some financial advisors encourage people to save at least six months of salary before buying any insurance or making any investments. This rule of thumb is a good starting point for anyone learning to save.

Some would argue that there isn’t much left to save since employees contribute 20% to the Central Provident Fund (CPF).

Well, if that’s the case, why do we need to implement a new unemployment insurance in Singapore when we can tweak the CPF system to offer some support during the unemployment period?

One way is to allow retrenched workers to withdraw a small sum from their own CPF and then return it back into their account when they are re-employed. This is no different from borrowing from a bank, just that the bank in this case, is in your name and you’re responsible for it.

Do we need to do more to provide workers’ protection in the form of unemployment insurance or improve our people’s financial literacy? Which is better for Singapore and does it solve the problems we are trying to address?

Sufficient premiums in years of low redundancy

Benefit

WP’s proposal states that no government top-up would be needed in years where redundancies are low. They also argue that even in years of high redundancy, top-up may not be necessary if unemployment insurance in Singapore has been running for a few years prior to those years.

There is some merit in introducing the scheme when unemployment is low so there is lead time in generating enough reserves for the future.

Drawback

That said, there will be government top-ups when redundancies are high. Where will the budget come from? Will income tax or GST increase?

According to WP’s proposal, premiums are also expected to increase when unemployment insurance in Singapore has shown that job creation and investment are not affected.

So while employees and employers might be happy contributing a meagre sum of $1.90 a month (based on median wage of $3,782) to receive 40% payout for up to six months, this is just the beginning and is likely to increase over the years.

Countries with national unemployment insurance schemes generally require at least 1% to 3% contribution to keep the scheme sustainable. If we benchmark against these countries, how long can our 0.1% contribution last before we increase the contribution rate?

Singaporeans are a helpful bunch but are we ready to support retrenched workers who…(how do I put this in a nice way) are better off without help? Workers who abuse the system…workers who are freeloaders and end up getting retrenched…are we willing to support this group of workers?

Most importantly, are we ready to walk this slippery slope? Once people are used to the idea of welfare benefits, it will be difficult to eradicate the system.

So is unemployment insurance the way forward for Singapore?

Be the first to comment

Leave a Reply

Your email address will not be published.


*