Wednesday, February 11, 2009

Malaysia Needs Unemployment Insurance

Our government has been postponing the need for unemployment insurance for too long. We do not have sufficient safety nets underpinning our country's social and economic systems. The concern has always been the cost side. The other argument is the incentive not to work. There is a bigger danger in having unemployment insurance - companies may be more "willing" to bite the bullet to lay off workers in such an environment.

We already have too many archaic rules pervading the economic life of Malaysians. Its quite debilitating really. Its a system that highly favours the corporations and banks in particular. We have little in safety nets, yet our bankruptcy laws are so archaic and put Malaysians at a huge disadvantage. Linked closely to unemployment is bankruptcy. First, the sum which can bankrupt a person is only RM30,000. Its high time that that be raised to a more realistic level, say RM50,000.

Secondly, the bankruptcy is technically life long till the debt is totally repaid (although the Insolvensi department can recommend a person to be cleared after 7 or 8 years if he/she has been diligent in making monthly payments). Most countries will discharge a person under bankruptcy after 4 or 5 years. I believe in HK its 4 years. We should make it standardised that all should be cleared and discharged after 4 or 5 years. Even prison sentences don't run that long. The banks have all written the bad debts off already, now we are just trying to put in a reasonable time to collect the debts. The current system is not fair at all.

Thirdly, the Immigration department mentioned recently that some 13% of all Malaysian passport holders have their traveling access restricted because of bankruptcy and/or income tax non payment. The restrictions are usually lifted when the parties has struck a payment scheme with the relevant departments. We have seen so many defaulting on study loans and unnecessary credit card debts. Worse are those who stand as guarantors naively for loans. Imagine standing as guarantor for a RM200,000 loan and the person is nowhere to be found and the departments and banks come and get you instead.

Fourthly, the 13% figure is alarming, we need to revamp the laws immediately as it affects a substantial portion of the population. Locking them under archaic laws prevent many from owning properties and even rebuilding their equity, and as such prevent them from re-participating fully in the economy.

We have no unemployment insurance, and every 7-10 years we will have a massive recession and many might not be able to honour their commitments owing to forces greater than them. We can take the pedestal and say they deserve it for not being able to manage their financial affairs properly, but seriously, even drug addicts and prisoners get a second chance to rebuild their lives. I am not here to justify reckless behaviour, but to ask that the laws be fairer to the normal person. When you unfairly penalises a person, it does not just affect the person alone, in Malaysia's culture, people also have to take care of their parents and extended families. Hence the social impact is substantial.

I am not an insurance guy, but I think we can come up with a semi government body to do this, or even be part of EPF to do this. EPF can do this role well as it already has the database for checks and balances. How about all employees contribute 1.5% to this Fund and the employer puts in another matching 1.5% of salary. Only employees who have contributed more than 1 year will be able to enjoy the benefits. If you are laid off, you will get 3 months full pay and 5 months of half pay of your last salary. These will be paid like normal salaries on a monthly basis, thus covering most expenses for at least 8 months. This will be in additional to the normal notice pay and severance pay. Once you have taken the unemployment benefits, you will need to be working for at least another year before being qualified to obtain the benefits again.

Like I said I am no actuary, but all things being equal, the monthly 3% to the fund basically means 1 person is covered for every 33 employees. All thing being equal again, in a downturn the Fund should be more than able to carry a 300 basis point jump in unemployment (e.g. if unemployment rate jumps from 3.5% to 6.5%, technically speaking we are better equipped to deal with it. EPF has the database and will be able to verify when a person has found new employment. In any system there will be bad hats trying to find loopholes - heavy penalties should be meted out to discourage bad behaviour by employers and employees.

During good times, the Fund will be able to accumulate surpluses, thus covering the outflows during bad times. It is not meant to be a crutch but part of a developing structure for a developing nation, that seeks to minimise social costs, where we can grow and shoulder the good and bad together. Any major shortfall will be borne by the government, which won't be necessary if the calculations are made properly.

I will send this to Najib as well, I hope he will do something about this. Of course I will not send the photos along with it... hmmm... maybe I should??!!

p/s photos: Meisa Kuroki


easystar said...

Hi SD,

The tricky thing with unemployment insurance is that it HAS to be unemployment insurance. A linear relation between premiumn paid and benefit is not needed (so some cross subsidy can occur), but Western style access to insurance benefit where ZERO premium is ever paid is not good for the society (genuine disability excepted)

Another tricky thing is that people likes something for nothing. So, the next politician will probably raise the benefit to get elected, and leave the funding issue to the next guy.

Such insurance schemes got to be written in the law rather than a schedule where the minister can alter to his favour/liking.

And, true to Malaysia form, how can we prevent cases where bumi unemployment benefit would be say, 5% enhanced compared to everyone else ?

Bankruptcy - the reforms need to come both ways. We have bankrupts who still run big corporations through his/her spouse and go everywhere in Benz. On the other hand, people who have been honest but fall on hard time should indeed be discharged after 2-3 years. Repeated offender should however be punished.

Jasonred79 said...

Unemployment benefits?


Hahaha. It's a good idea, it would be part and parcel of becoming a developed nation, but...


Malaysia is extremely backward as far as unemployment goes.

Firstly, we do not have an Unemployment Body in our government in the first place, do we?

AFAIK, you don't even have laws governing sacking workers. Or, we do, but no one adheres to them.

Anyhow, in Malaysia, if you are retrenched, the solution is often as simple as applying for a government job. You won't get a very high post, but apparently if you apply for the lower end jobs, they'll take anyone with a degree...

As for bankruptcy... er... the issue is that Malaysia has too many jokers who squirrel away money. The lack of TRANSPARENCY is the killer.

I get your point about those unfortunates who did their best to pay up/ were bankrupted by offering to stand guarantor to the wrong person.

However, you must also think from the perspective of people who were financially ruined by some large creditors who declared bankruptcy... and these "bankrupt" people are in fact still living luxuries lifestyles, due to numerous hidden assets.


All in all, I would summarise and say: our bankruptcy system is very very backward and needs a LOT of work done on it.

Overall, your suggestions are great. But I think that they are like trying to build a house on sand... the foundations are just too week. Have to dig up all the sand and put proper earth and concrete first.


I think one thing that can be done immediately is a provision for people who stood as guarantor for someone else.
I've heard too many stories of the woman who stands guarantor to her husband/boyfriend... who then runs away/ dies/ remarries.

BTW, I think that the 4-5 year limit on bankruptcy just doesn't fit in our day and age. I mean... look at our current fresh graduates. FIRST thing they do upon securing a job is taking a 30 year housing loan and 7 year car loan. Now, how many of these guys do you think would declare bankruptcy if they could be declared debt free in 4-5 years?

Seriously, if you think about it from that perspective, taking a housing loan and declaring bankruptcy "earns" them around 50k a year (250k in 5 years). Would they earn that much working in their normal job? ... NO.
Does declaring bankruptcy make them automatically lose their current job? ... NO.

I think we need better bankruptcy courts... each bankruptcy case really needs to be judged separately...

see said...

This social safety net issue was raised during the Asian Crisis. But as M'sians have short memory or we are generally in malaise, its forgotten when crisis was over. The bankruptcy revamp is a good idea because we should not be penalising people for life especially small business failures. Let more people take entrepreneural risks. If we are so risk adverse we might be stuck with GLC economy

de minimis said...


This idea merits serious consideration. I hope you do send it to Najib (who seems to only prefer to read comments at HIS blog...or maybe his assistants read it for him).

solomon said...

If the Govt see it as a necessity for the future, just get it drafted and passed it as a law in the Parliament. You cann't have the perfect plan like the expectation of US stimulus plan, every now and then u can see people criticizing and hope it to fail. Come to think of it, maybe the Will whether it is political or economical, they are not strong.

With defintite, the backruptcy law needs to be more robust. Judging from the CTOS episode, we could not see more improvement. Sadly, Zaid is gone.

In short, we shouldn't we think of a way to raise our productivity and wage level first?

Winston Siew said...

your are such an idealist. Once this unemployment insurance is implemented, I will make sure I make full use of it ;)

To me this is like the unnecessary Beijing CCTV building inferno. First world infrastructure for the 3rd world mentality citizen.

Meggan said...

Unemployment insurance will not be possible so soon in developing coutries, i think it will take another 10 years or so.

Foxerlow said...

insurance malaysia is regarded as temporary insurance (as opposed to permanent insurance like whole life), and as such, it does not provide any surrender values, paid-up values, loan values or any of the non-forfeiture privileges.