SMU lecturer suggests Jamus Lim test out WP's Redundancy Insurance Scheme in Sengkang GRC

Many questions asked.

Julia Yeo | July 23, 2020, 05:10 PM

On July 17, Senior Lecturer of Statistics from Singapore Management University (SMU) Wu Zhengxiao wrote an open letter to Chinese daily Lianhe Wanbao, entitled: "Two suggestions for the Workers' Party (WP) Member of Parliament Jamus Lim".

In his letter, Wu applauded Lim for his "almost impeccable" performance at the debate as a politician.

Lim had garnered a large following after winning the hearts of many at the televised political debate on July 1, with many people impressed by how he held his own against veteran People's Action Party (PAP) politician Vivian Balakrishnan.

Questioned WP's minimum wage & 'redundancy insurance' proposals at debate

However, Wu also pointed out some economic holes in Lim's proposals at the debate, mainly on two of WP's policy proposals - the minimum wage scheme and the Redundancy Insurance Scheme.

In his letter, he wrote that he was "quite surprised" to hear Lim proposing a minimum wage, saying that most economists would "firmly oppose" the implementation of a minimum wage when there is rising unemployment and a downward economy.

He also questioned the sustainability redundancy insurance scheme brought up during the debate.

In WP's manifesto, the party proposed having redundancy insurance for workers who have been retrenched, providing them with a stipend for up to six months, complementing existing programmes for re-training and re-employment.

The scheme was proposed by the party in its manifesto to alleviate job insecurity workers face in light of technological disruptions and global events that have led to higher rates of redundancies.

Under the scheme, the average worker will pay a premium of S$4 per month into an Employment Security Fund, with employers matching the workers' contribution as well.

If the worker is retrenched, they will receive a payout equivalent to 40 per cent of their last drawn salary for up to six months, with a cap of S$1,200 per month and a minimum payout of S$500.

Using the current national average salary of S$5,596, Wu calculated the amount received by an employee classified as "redundant" to be S$2,238 per month, for six months, which does not appear to take into account the cap stated in the party's manifesto.

Wu implied in his letter that the premium would "realistically" be a lot higher than S$4 per month, based on what Lim said during the debate.

He also said that Lim did not explain the details of the policy in full during the debate, but attributed that to the lack of time during the debate.

Redundancy insurance proposed by WP since 2011

The scheme proposed by WP is not new, having introduced it in Parliament in 2017 but was rejected by the ruling party, said Dennis Tan on the Hammer Show on July 6.

WP also proposed the idea in its manifesto as early as the 2011 General Election, and was brought up again by WP MP Sylvia Lim during the 2016 Budget debate.

The idea of a redundancy insurance was also brought up again by the WP during the 2020 Budget debate in parliament.

Josephine Teo responded by saying that while the government keeps an "open mind" about unemployment insurance, she pointed out that it also had "serious downsides", reported the Straits Times.

"Today’s economic climate illustrates how such insurance could provide a stabiliser to workers, to soften the cliff-edge that they face with job disruption," Today reported Lim saying.

In response to the proposed policy, Teo said that the Government's current approach in providing employment support for mid-career workers who have lost their jobs is "more sustainable" than unemployment insurance.

Adding that there were "serious downsides" to the policy, Teo pointed out that the policy could reduce workers’ motivation to find work as well as decreasing the willingness of employers to pay retrenchment benefits.

Two suggestions for Lim

Wu congratulated Lim's team for their win at the election, saying that Lim has "chosen a difficult path".

Wu offered two suggestions:

"During the debate, he said that the WP will not disagree for the sake of disagreeing, which is well-said," he said.

"Here's my first suggestion - I hope that Dr. Lim can also apply this to his party's proposals, for example, the untimely minimum wage policy, instead of agreeing with it for the sake of agreeing."

Wu added a second suggestion - for Lim to test out the Redundancy Insurance Scheme in Sengkang GRC, if the WP thinks that the policy is feasible.

"At the next general election in five years, if Dr. Lim can say that the WP has "tested it", it would be more convincing than saying that they have "done the math" while proposing new policies," he said.

Here's the letter translated in full:

In my opinion, as a politician, Dr. Lim’s performance was almost impeccable; but as an economist and educator, his performance is worthy of discussion.

In the first segment of the debate, the host asked the candidates how their respective parties are planning to deal with rising unemployment and creating more jobs.

Dr. Lim mentioned that Singapore’s economy was facing its biggest challenge since independence, and that the Goods and Services Tax (GST) should not be raised at this time as it could hurt the economy. He then proposed a minimum wage of S$1,300 per month and a Redundancy Insurance Scheme.

By setting a national minimum wage of S$1,300, there’s no doubt that this could improve the quality of jobs in the market. However, like how we often discuss in economics classes, there’s no free lunch in the world. There are advantages and disadvantages to everything; so what’s the disadvantage to setting a minimum wage? The answer – we can’t have both quality and quantity, If the quality of jobs increase, the quantity of jobs will decrease.

The minimum wage has always been a contentious topic in the world of economics, with more against than for it. The mainstream view is this – if it’s for the sake of raising the quality of jobs, there are better policies and means, such as upgrading and improving employees’ skills and upgrading the industry.

Of course, it’s undeniable that there are economists who support the minimum wage system as well. However, during a time where there’s rising unemployment and a downward economy, I believe most economists would firmly oppose the implementation of a minimum wage. Because of this, I was quite surprised to hear Dr. Lim proposing a minimum wage in response to the host’s question.

What surprised me even more was the Redundancy Insurance Scheme proposed by Dr. Lim. He said, by paying just S$4 per month, an employee who has been classified as “redundant” will be able to receive 40 per cent of his last drawn salary for six consecutive months.

With low premiums and a high payout, the benefits of this policy sounds so incredible that it’s hard to believe. In the later segment of the debate, Dr. Lim emphasised that the WP has “done the math”, and that the policies proposed by the party are “budget neutral”.

Is redundancy insurance really feasible? I’ll do a rough calculation here. To simplify calculations, I will ignore salary increment over time. The current average monthly salary in Singapore is S$5,596, so 40 per cent of that is S$2,238. In six months, that will be S$2,238×6 = S$13,428.

On average, how long does it take before each Singaporean employee can receive the redundancy insurance payout once? [As the Chinese saying goes,] the wool grows on the sheep. With a monthly premium of S$4, for the policy to be sustainable, then on average, every 13,428÷4=3,357 months, or roughly 280 years, the employee can receive one insurance payout.

In other words, if a worker works for 40 years in his lifetime, then there’s only a 40/280 (or one-seventh) chance he will be able to receive this insurance payout. Conversely, this would also mean that there is a six-seventh chance that the worker will pay S$4x12x40 = S$1920 in premiums without receiving a single cent back.

This is often talked about in economics: you get what you pay for. Insurance products with low premiums and high payout do exist, but the majority of customers often never get their payout. Does this calculation contradict Dr. Lim’s statement? Not at all. Indeed, the redundancy insurance scheme is “budget neutral”. Furthermore, everyone has a different idea of what a ‘redundant’ employee is, which Dr. Lim did not have enough time to explain and define in detail during the debate.

However, is that what Singaporeans want? I’m afraid not. If we assume that a Singaporean receives a redundancy insurance payout once every 10 years on average, the monthly premium would cost S$4×28 = S$112, amounting to S$1,344 annually.

As a politician, Dr. Lim performed admirably at the debate, evidently by his victory at the polls. However, as an economist and educator, his performance was less convincing. He didn’t explain his policy well and clearly, and only spoke of the benefits but not the disadvantages of the policy. Of course, this was mainly due to time constraints of the debate.

I’d like to first congratulate Dr. Lim and his WP team’s on the election results. He is very courageous, and has picked a difficult path for himself. Economists only need to speak about strategies on paper, while politicians need to make things happen in reality.

Finally, I’d like to give two suggestions to Dr. Lim.

During the debate, he said that the WP will not disagree for the sake of disagreeing, which is well-said. Here’s my first suggestion – I hope that Dr. Lim can also apply this to his party’s proposals, for example, the untimely minimum wage policy, instead of agreeing with it for the sake of agreeing.

I’m sure that Dr. Lim is aware of how economists Abhijit Banerjee, Esther Duflo and Michael Kremer won the Nobel Prize for Economics in 2019 for their experimental approach to alleviating global poverty using randomized controlled trials (RCTs).

Here’s my second suggestion – I hope that he can also apply this experimental approach to the WP’s proposals. Using the Redundancy Insurance Scheme as an example, if the WP believes that it is feasible, perhaps they could test it out in Sengkang GRC and provide the insurance for residents, and see the results of it.

At the next general election in five years, if Dr. Lim can say that the WP has “tested it”, it would be more convincing than saying that they have “done the math” while proposing new policies.

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Top image via CNA/YouTube