Tackling income inequality

What is the issue about?

Rising income inequality over the past decade, even as overall living standards have risen, has made scaling the socio-economic ladder seem an increasingly difficult task.

Singapore's Gini co-efficient, which is a widely used measure of income inequality, has increased to 0.473 last year, from 0.454 a decade ago. The closer to 1, the more unequal incomes at the top and bottom are. Even after accounting for government transfers and taxes, the Gini index narrows to 0.45, but this is still lower than Nordic countries’ Gini coefficient of around 0.3 and below.

Another way of looking at income inequality is to compare the ratio of incomes of the top 20 per cent and bottom 20 per cent of income earners. For Singapore, this has widened from 10.1 per cent in 2000 to 12 per cent in 2010.

The rise in income inequality has happened despite an average economic growth rate of more than 6 per cent over the last decade. It has led to concerns that the economic pie is not being well-distributed among Singaporeans. This in turn is having an effect on education opportunities, and social mobility.

Prime Minister Lee Hsien Loong has observed that social stratification is “sharper than before”, and that “the children of successful people are doing better, the children of less successful people are doing less well”.

Inequality is rising in many countries around the world, but why does it appear to be rising at a faster pace than most in Singapore?
Economists have pointed to a combination of global trends and domestic factors.

In a background paper titled “Inequality and the need for a new social compact” six economists (Manu Bhaskaran, Ho Seng Chee, Donald Low, Tan Kim Song, Sudhir Vadaketh, and Yeoh Lam Keong) address the factors causing income inequality.
They argue that it is a result of the interplay of globalisation, technology and domestic factors such a liberal foreign worker policy.

Read the paper here.

In short, globalisation and the increased international trade of goods and services, and the entry of low wage workers from China, India and other developing countries, have increased competition and access to cheap labour.
Meanwhile, technological progress has reduced the reliance on low skilled jobs, exacerbating a gap between the skilled and unskilled workers in many developed countries. Singapore is not immune to such forces. As a small, open economy, it has embraced globalisation and technology, but is therefore also feeling the effects of these two global phenomena.

But domestic factors such as the aggressive slashing of personal income taxes and liberal immigration and foreign worker policy have accentuated the rich-poor divide. The economists argue that cutting personal income tax to where it is now at 20 per cent for the top income earners, has made the tax system less progressive. Immigrants and foreign workers, meanwhile, have come to Singapore in droves.

"High income talent raises average incomes at the top while low-skilled foreign labour keeps wages at the bottom depressed. The result is a further "stretching out" of our income distribution," the economists said.
Both Mr Lee and Deputy Prime Minister Tharman Shanmugaratnam have spoken extensively on income inequality and social mobility.

They have argued that as Singapore is a small and open economy, it will inevitably have a higher Gini coefficient than most large countries.

But compared to cities such as Hong Kong, London and New York, and even cities in emerging economies such as Beijing or Shanghai, Singapore’s Gini coefficient is comparable and lower in some cases.

Mr Tharman has outlined the broad factors the Government feels are needed to address inequality: maintaining social mobility and lifting the wages of low and middle-income earners; and complementing this with the progressive redistribution of income through taxes and transfers, without overburdening the middle-income group.

Why it matters

Excessive income inequality may have profound effects on social cohesion and stability.

Economist Joseph Stiglitz has sounded a warning of the same trend in the United States. In his book The Price Of Inequality, the Nobel Prize winner says too much inequality leads to a perception that the system is unfair, and to widespread mistrust of a government.

Member of Parliament Irene Ng (Tampines GRC) said in Parliament in March this year: “If we continue in this trajectory, we will be an increasingly rich and unequal society with an upper class of the super-rich, and an underclass. An underclass of Singaporeans stuck in low-paying jobs can only lead to more social tensions.”

Reports that Singapore is home to more millionaires per capita than anywhere else in the world, or the increasing number of flashy cars on the roads, as some struggle to make ends meet, only add to perceptions on the ground that inequality is getting worse.

A recent Straits Times poll of 400 Singaporeans found that eight out of 10 worry the income gap will slow social mobility while six out of 10 think the Government is not doing enough to help people move up the socio-economic ladder.
The good news is that while perceptions are that social mobility is waning, a comprehensive study by the Ministry of Finance (MOF) has shown that social mobility is still very much alive in Singapore.
The study tracked 39,500 father-son pairs who are Singaporeans or permanent residents. The sons were born between 1969 and 1978. For someone whose father was in the bottom 20 per cent of income earners, he had a two-third chance of breaking out of that income group.

The son had a 10 per cent chance of rising to the top 20 per cent of income earners here. The son of a primary-educated father was also likely to leapfrog his educational background by at least two rungs, rising on average to an A-level or ITE certificate. And 45 per cent made it to a diploma or university education.

However, MOF issued a word of warning in its report. It said that the moderately high level of mobility for the cohort it studied might not apply to future generations.
The Government has been quick to point out that it is actively intervening earlier in a child's access to education, and aggressively redistributing the wealth.

Government transfers to families in the bottom 20 per cent in the last five years had amounted to almost 20 per cent of the household income per household member.
A low-income household can expect to receive $3.97 to $5.10 in benefits for every one tax dollar paid.

A person in a four-member family living in a two-room Housing Board flat and with a combined income of $1,200 a month, can get up to $5 for every dollar of tax paid over a lifetime, the Government said.
Based on current prices, retirement age and life expectancy, the household pays $113,000 in taxes, such as GST and water conservation tax, over a lifetime.
But the family can also expect to receive $535,000 in real terms, through cash, subsidies, permanent transfers, CPF top-ups, housing grants and other transfers.

This year, the Government also introduced a permanent GST Voucher which is intended to offset the 7 per cent GST for low income households.
It has also said that social spending will have to increase, but has warned that taxes will also need to rise eventually - within the next 20 years, to be precise - to fund it.

Some facts and figures:

These charts show how income growth here stack up against other coutnries in the world. There is also data that shows how government transfers are given disproportionately to the low income to try and lessen the inequality.


Chart: Annualised real median income growth (2005-2010) (%)Description: Tags: Author: charts powered by iCharts


What lies ahead?

Tackling income inequality and social mobility is both an economic and political issue. There have been many proposals to address these important concerns. Some economists have suggested that there needs to be an increase in social spending and the redistribution of wealth through higher personal income taxes. They want to move Singapore further towards a more Nordic model of welfare, as seen in countries like Sweden and Denmark.

Others such as Professor Lim Chong Yah, have suggested raising wages at the bottom through "shock therapy", or the introduction of a minimum wage.

Still others want fewer foreign workers let into Singapore, while those opposing it, want to keep those foreign workers coming in. Several issues will dominate the headlines as a new social compact gets formed:

1. What kind of economic growth will be best suited for Singapore?
2. What amount of tax rates and social spending is the right balance for Singapore?
3. Can productivity be raised fast enough as the inflow of foreign workers is tightened?

Deputy Prime Minister Tharman Shanmugaratnam said at this year's Budget: "A whole array of social and economic strategies is aimed at achieving this defining goal (of inclusive growth). It means upgrading our economy and developing deeper skills, so that we can sustain growth, create better jobs in every vocation and enable Singaporeans to earn better incomes. It means doing more to help children from poorer homes overcome early disadvantages, find their strengths and develop to their fullest potential, so that we keep social mobility up."

The solutions are still evolving, but what is clear is that income inequality and social mobility will feature prominently in any debate on Singapore's future.