Reviewing Workers’ Party Retrenchment Insurance Proposal

A few days ago, Workers’ Party released a consultation paper regarding a Redundancy Insurance scheme and I read it with huge interest.

With calls for more social safety nets in Singapore in recent years, sacred cows have been slaughtered and we actually have minimum wages for specific sectors like cleaners and security guards now.

This shift is apparent since even PAP MPs like Patrick Tay from the Labour Movement has come out to say that the concept of unemployment insurance should be studied further before we dismiss it out of hand. In fact, about half a year ago, Straits Times ran an article calling for an unemployment scheme to help support those in between jobs.

I will admit that I am very much on the fence with regard to an unemployment insurance or retrenchment insurance scheme in Singapore. Apart from the obvious benefits of payouts to sustain a retrenchment or periods of unemployment, there is the fear of people becoming dependent on these payouts and the sustainability of such a scheme.

At the end of the day, it’s also whether a new scheme adds significant value to the current arrangements available to help the retrenched or unemployed.

So, let’s take a look whether this latest proposal from the Workers’ Party strikes a chord with me.

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Key Details of Retrenchment Insurance Proposal

• Each employee contributes 0.05% of his salary. Employer contributes 0.05% for each employee into this Employment Security Fund.

Example: I take home $4,000. As a participant of this scheme, I will contribute $2 a month and $24 a year. My employer will be matching this amount.

• If the employee is retrenched, he will receive a payout of 40% of his last drawn salary for up to 6 months (up to a monthly cap of 40% of the prevailing median wage).

Example: I take home $4,000 and last month, I was retrenched. If the prevailing median wage is $3,000, I will receive $1,200 (0.4 x $3,000) for the next 6 months if I remain unemployed.

The Good about This Proposal

1. It is a retrenchment insurance, not an unemployment insurance

Abuse is likely to be minimised and more manageable since retrenchment is a decision from the company and not by the employee.

2. The numbers seem to work out based on current parameters

With 2.2 million employees and an average wage of $4,000, the annual contributions to this Employment Security Fund will be roughly $100 million (2.2 million x $4 x 12). From 2007-2015, an average of about 8,000 to 9,000 workers were made redundant and even if assuming all or most of them earn the median wage of $3,000 and above, payouts would only total $60 million.

According to Workers’ Party, even after accounting for administrative and enforcement costs, the fund should be sustainable.

3. It is a progressive scheme

Higher income workers will contribute more in absolute quantum to the scheme and if they are retrenched, they will receive less.

And in this proposal, employees who earn $500 or less will receive the full quantum of their pay for six months and those earn earn between $500-$1000 will get a $200 top up on top of 40% of their last drawn salary.

Example: A worker who was earning $500 will still receive $500 of benefits for the next 6 months after retrenchment while a worker who was earning $1,000 will receive $600 ($400 + $200).

Note To Workers’ Party: A $300 top up would make more mathematical sense to ensure that someone earning $600 would not receive less benefits as compared to someone earning $500 if both were retrenched.

The Not-So-Good about This Proposal

1. This proposal is not adding enough value to retrenched workers

For the low-income, there is already ComCare for them to turn to and ComCare disburses more than $100 million of social assistance to the needy in a year. Furthermore, instead of being funded by the workers, ComCare is funded by the government.

For PMETs and the middle-income, this proposed scheme’s main aim is to provide temporary support for them so that they can think long-term and not be pressured to accept the first job offer they find.

I might come across as a little crude and judgemental here. But my view is that if a person is earning at least $4,000 a month and has worked for at least 5 years, he should have set aside at least 6 months of salary/expenses for a rainy day (i.e. retrenchment). Barring exceptional circumstances, failure to do so seems to indicate that he is likely a person with a short-term mindset.

And it’s extremely naive to think that the extra $7,000-$8,000 of retrenchment insurance payouts will suddenly make him adopt a long-term mindset. In fact,if he absolutely needs the insurance payouts to tide through, he will probably still accept the first job he can find once we come to the end of that six month period.

As SIM Economist Walter Theseira puts it in this article:

“There are already schemes to help those in need. We have to understand what problem unemployment insurance is meant to solve. If the problem is subsistence for low-income households, unemployment insurance isn’t necessary because we have a framework of providing them cash assistance, although we can debate whether that assistance is enough.”

“If it’s giving people a buffer between jobs, is unemployment insurance the best way, or should we encourage people to set aside their own savings?”

2. This proposal could make it more expedient for employers to retrench workers

During the previous recession in 2009/2010, the government came up with the Jobs Credit Scheme to preserve jobs. And for some companies, instead of firing one fifth of the workforce, employees worked a shorter 4 day week instead of the usual 5 and took home a fraction of their previous salaries. These measures moderated the number of retrenchments. 

Retrenchment was a last resort. However, with the implementation of this scheme and with employers footing half the bill of the retrenchment insurance, there is a good chance they could be less hesitant to retrench workers.

3. Government top ups might be necessary in future

A few assumptions that Workers’ Party made might not apply. As mentioned above, retrenchments might rise. At the same time, more and more people are becoming freelancers in this gig economy and the number of participants and contributors might decrease, thus making the whole scheme unsustainable eventually.

4. Abuse from self-employed

The self-employed can join this scheme although they can only claim from this scheme once every 3 years. This could make it potentially easy for some self-employed to game and abuse the system and really claim once every 3 years. There might also be potential scam cases whereby employers collude with relatives and friends to hire, retrench and apply for retrenchment insurance payouts?

5. Lack of Exclusion Conditions

For wealthy people who are staying in private apartments, is it fair for them to receive these benefits if they are retrenched?

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At the end of the day, I am quite lukewarm towards this proposal. Granted that if I had to propose something along the retrenchment insurance line, it wouldn’t be far off what Workers’ party proposed.

It ultimately boils down to whether such a proposal in this form adds significant value to the current arrangements available to help the retrenched.

And yes, do share with me your views on this Workers’ Party proposal!