Economy after the pandemic Unemployment insurance can be costly
Many people like an unemployment insurance scheme, but they do not realize that it can be very costly.

For example, if 5% of the workforce is unemployed, the unemployment insurance scheme can cost 5% of the wages. Are people willing to pay such a high premium rate for this insurance? Most of them are not willing to.

The cost can be higher, if it encourages some people to be unemployed to enjoy the benefits from the insurance scheme.

In many countries, a large part of the unemployment insurance is paid from taxes. The tax rate is high. The tax payers object to this cost.

The cost of unemployment insurance can be reduced by applying some of the following measures:

a) Limit the period of payment - e.g. to exclude the first three months or to pay the benefit for a maximum of 12 or 18 months

b) By giving a benefit that is lower than the income earned from work, e.g. 70% of the previous income.

Even so, the cost can be increased due to potential abuse of the scheme by the claimants.

For a country such as Singapore that has not implemented an unemployment insurance, there is an alternative to this scheme.

This alternative is to allow the unemployment person to make a withdrawal from their retirement savings, .e.g the Central Provident Fund in Singapore.

When the claimant has to request for withdrawal from personal savings, he is likely to be more careful about making the request, compared to claiming unemployment benefit that is paid by somebody else, i.e. the tax payers or the other working people.

Some people may be misled by the low rate of unemployment in Singapore, i.e. less than 3%. 

This rate is grossly under-reported. The actual rate is much higher, if under-employment is counted. 

When an unemployment insurance scheme is introduced, the real rate will appear. 

In the case of countries with unemployment insurance, the rate of unemployment is usually higher than 7% or even 10%. Singapore is likely to see this higher rate as well.

I caution people from expecting an unemployment insurance scheme to be introduced by the PAP government. 

At best, they will introduced a scheme that pays so little, that it is not likely to offer much help to the unemployed and retrenched workers. 

It is better for them to introduce early withdrawal from the Central Provident Fund. 

The early withdrawal will deplete the savings in the CPF and cause a larger proportion of workers to have inadequate savings or retirement. 

We have to accept this outcome. We have to look for ways to provide suitable jobs for the elderly who need to continue working beyond the normal retirement age, due to inadequate savings. 

I will suggest a solution to provide "elderly work" in a separate article. 

I hope that you will agree with my analysis - that it is better to allow early withdrawal from CPF savings to meet the financial needs of the unemployed workers, rather than to introduce a costly unemployment insurance scheme.

Tan Kin Lian





 

Add Comment

---