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Why Britain Needs an Optional Private Unemployment Insurance Scheme
by John Brian Shannon | January 1, 2017
Like all developed nations, Britain has a government-backed unemployment insurance scheme where workers pay fractional amounts of every pound sterling they earn to a national unemployment insurance fund during their working years.
Consequently, whenever a British worker becomes unemployed due to lay-off, that worker begins to collect unemployment insurance which pays them a portion of the wage they earned while they were employed, as a weekly benefit.
It’s a system that prevents millions of workers from experiencing the worst financial duress during periods of unemployment, or from spending their life savings during extended periods of unemployment.
In the interests of helping British workers, were the British government to pass legislation requiring the national unemployment insurance scheme to pay British workers a full 90% of a worker’s normal wage during his/her unemployment, there would be howls of protest from various quarters and the present unemployment insurance premiums paid by British workers would rise dramatically.
Though such legislation would benefit hundreds of thousands or even millions of British workers (at any given time there are likely to be 1.1 to 2.0 million unemployed people in the UK) many more millions of citizens would rail against such a plan — even though (unbeknownst to them) their own employer might be writing out their pink slip at this very moment. Which is to say, you never know what the future holds.
Almost everyone becomes unemployed at some point in their life. For seasonal workers it can be a few weeks to a few months every year. And it can occur suddenly, to anyone.
But none of the foregoing precludes the British government from passing legislation allowing private insurance companies to sell optional, additional, private unemployment insurance coverage to workers — over and above the national unemployment insurance scheme which pays only a small portion of a worker’s wage as benefits during times of unemployment.
In the interests of writing ‘a simple blog’ instead of ‘a large book’ I have dramatically simplified the Swedish example below, as it could be a complicated explanation, as different plans are offered by different companies over and above the legal minimums required by Swedish labour law (2007)
In Sweden, beyond what is mandated by Swedish law to be paid to workers during periods of unemployment (80% of the worker’s previous employment income) workers can buy any amount of optional, additional, private unemployment insurance for any amount of coverage (up to 99% of their normal wage) and as the insurance premiums are automatically deducted from their monthly wage, there’s no need for them to worry about forgetting to pay their private unemployment insurance premium payments.
- To provide a hypothetical example, Swedes can opt to pay the equivalent of one cent per dollar while employed to the private unemployment insurance provider, allowing them to receive up to 90% of their normal pay during unemployment
- Again, (a hypothetical example) to move up to 99% coverage, Swedes can choose to pay the equivalent of two cents per dollar.
It should be noted that actuaries for each private insurance company choose their particular factors, meaning that these things are never calculated by the equivalent of exactly one or two cents, etc. but rather by fractions of cents.
NOTE: In Sweden, the private insurers pay on a weekly schedule due to decades-long tradition there. Also, the Swedish government don’t care where private insurers are investing unemployment insurance premium revenues, as long as every unemployed worker gets his/her payments on time.
In Canada, a simple to understand and administer unemployment insurance system (called EI) provides government unemployment insurance that pays workers some 66% of their previous wage after getting laid-off (but not fired) from their job.
In Canada, both employers and employees contribute to the EU scheme and the per dollar contributions are set at a high enough rate to allow the entire scheme to earn a small profit for the government. In fact, Canada has again revised the rate downward as the scheme was too profitable! (It’s the second time in recent years that the rate has been revised downward as the entire EI scheme was embarrassingly profitable for the Canadian government)
It would be so easy for private companies in North America to offer optional, additional unemployment insurance coverage for only pennies on the dollar.
In fact, there has been some baby-steps toward that goal in the U.S. However, in the United States, optional, additional, private unemployment insurance coverage is a new thing, consequently, insurance companies are extremely cautious, are charging high rates, and have few applicants. At least until they get some experience with the new-ish business model.
For Canadian and U.S. insurance companies, it would be simple to add optional, additional, private unemployment insurance coverage (on top of the government unemployment insurance scheme that usually calculates benefits based on 66% of the worker’s previous wage) thereby allowing workers to top-up their unemployment insurance coverage at their discretion — to 80%, 90%, or even 99% of their previous wage. As each worker’s financial situation is different it must be the workers’ decision how much additional insurance coverage they purchase.
It might cost 1 or 2 cents on the dollar for each worker to obtain such additional coverage for themselves during periods of unemployment. But in an era when it seems everyone is spending every dollar they earn just to stay afloat, it makes sense to boost unemployment insurance benefits up to 99% of a worker’s previous wage when combined with the government benefit, and to do so via private insurers so that governments don’t need to spend more on unemployed workers. And all of that for only pennies on the dollar.
At first blush, workers might ask; ‘Why would a company want to sell additional unemployment insurance to workers over and above the national unemployment insurance plan?’
And the answer is; It’s profitable for them for two reasons.
One, the worker premiums (payments) allow the insurance company to make a small, but respectable profit.
Two, all the money paid to the private insurer by workers is invested in the stock market where the private insurance companies can make very significant profits.
It’s a business that allows private insurers to ‘have their cake and eat it too’ — the cake is the revenue generated via the normal payroll deductions of workers enrolled in the private insurance plan — and the icing is the revenue that private insurers earn by investing that huge pool of money in the markets. Which adds up to a great business model.
To Build a Better Britain, it behooves the UK government to allow private insurers to sell optional, additional private unemployment insurance over and above the government unemployment insurance plan, as it would allow workers (who have no control over the unemployment rate, nor of the overall economy) to continue to pay their bills on time, to live their lives normally, and to continue with their particular life plan — with much less personal upset and financial distress during periods of unemployment.
Building a Better Britain means strengthening worker supports during times of unemployment without it costing the government a single pence.
It signifies responsible government that places the needs of workers and their families at a higher level, while concomitantly creating a new, useful, and valuable product for British insurers to sell, thereby adding billions of pounds sterling every month to the London financial sector.
See, it really is ‘Win-Win’ when government places the needs of workers and their families first.