Friday, September 04, 2015

Before you vote on Sep 11 : How to make your own minimum wage and unemployment insurance.

I was actually quite apathetic to this year's elections, that is until I came upon snippets of the Worker's Party manifesto on their proposal for minimum wages and unemployment insurance which warrants some gentle intervention from a finance blogger.

But first of all, I don't want this article to lobby for any political party.

Just because I think that WP's ideas on minimum wages and unemployment insurance are wrong does not mean that the reader is being asked to support the PAP. This is because WP will not be able to execute on their manifesto even if gain two more GRCs this year.

Readers are free to support WP as it would have the positive effect of debating their ideas more rigourously.

I also don't want to get too deeply into the politics of minimum wages and unemployment insurance. I am right-winged conservative and readers should know that I will be biased once we get into a political discussion. I'm always for personal responsibility over tax-payer intervention. Tax me less and I will ensure that my family will not be an unfair burden to society.

Instead, I want to show how you can make your own minimum wages and unemployment insurance.

a) Unemployment insurance.

The easier target is to consider unemployment insurance. Based on what little I understand of the manifesto, WP seems to claim that a 0.1% salary contribution from employer and employee can generate about 6 months of pay up to the median income which was $3770 in 2014 for all unemployed citizens. The maths just does not square with me because WP probably made some assumptions about the forward looking unemployment rate when they designed the scheme without considering whether the scheme would actually lead to more people becoming unemployed.

Until I see more evidence, I am inclined to believe that WP drank a lot of Kool Aid when they agreed to publish this idea.What baffles me is that there is a better solution out there : Just let an unemployed person draw from his own CPF-SA a limited amount for 6 months, then make him contribute back when he starts work. No CPF-SA contribution, no insurance.

If you decide to make your own unemployment insurance, simply save 6 month x $3770 or $22,620 after starting work. You can now buy risk-free Singapore Savers Bonds and be your own insurer.

Downside is that you need to be a disciplined saver for 1-2 years if you are a fresh graduate to create this safety net.

Upside is that just holding onto the safety net for a year without drawing upon it will net you $500/year at 2.63%.

b) Minimum wages.

Suppose you have already created your safety net, now you want a synthetic minimum wage.

WP's idea of minimum wages is 80% of $1,250 or $1,000 per month or $12,000 a year. You can roll your own by using a portfolio of stocks with dividend yields.

If your portfolio yields 6%, you need approximately $200,000 to have this portfolio pay your minimum wages. If your portfolio yields 8%, you will only need $150,000 to have this portfolio pay your minimum wages. If you buy only Singapore Saver Bonds, it would require $457,000 to generate these required returns.

( Other financial bloggers do have great suggestions on how you can adjust your lifestyle to save more money and obtain these yields by investing correctly. )

At this point, you will start to protest that I am being unfair.

A WP supporter will say : If a person cannot draw a minimum wage, short of winning Toto, how can he build a portfolio of assets to pay a minimum wage ?

That's my real point : A worker who is worth $500 a month but is allowed to draw $1000 a month is tantamount forcing the business to set aside  50% x $457,000 to sustain him - all for nothing.  That's the whole point about waste which has to be borne by entrepreneurs.

To pay a minimum wage of $1,000, businesses need to ensure that the worker adds at least $1,000 of value. Using risk free assets, it takes close to half a million dollars to generate an effortless minimum wage of $1,000 a month. A very cruel burden to the entrepreneur.

This isn't even a political argument for the upcoming elections - This argument does not even make the PAP look good because Progressive Wages run into the same issues I have raised ! PAP needs to convince conservatives why are the businesses in select sectors providing welfare to workers while other sectors do not need to do so.

I think readers of modest professional means should make it a resolution to create a portfolio to generate a $12,000 minimum wage using whatever instruments which they are familiar with to improve their personal fiscal resilience. While the numbers are modest and can be achieved within a decade worth of work, the true value of this exercise is in allowing someone to appreciate just how much capital it takes to sustain even one minimum wage worker.

Another words, do it for yourself, then judge others based on your own personal experience.

After you determine whether it is fair to impose this financial burden on the business man, tax payer, or the individual, then you would be able to vote your preferred party without regret or remorse.


  1. Hi Chris,

    I have a question for you! I am trying to build up a stock portfolio but so far my success has been limited. Can't decide whether to go for dividends or value etc + make wrong decisions like selling out of fear etc. Nowadays I have been tilting more towards dividend investing then trying to make a quick buck out of trading... Do any of your books cover dividend investing? Like what I should look at for dividend stocks, holding period etc. Any books to recommend? thanks!

  2. Yes, my books do cover a bit a dividend investing ( Harvesting the Fruits of Prosperity ).

    Most books are written by American authors. You are better off following the blog aggregators. Collectively us financial bloggers would provide plenty if investing ideas for the public.

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