Opinion

Singapore's Social Support System: Two Anomalies

The Singapore economy is rising with the tide of globalisation, but not everyone appears to be prospering equally.

Date Posted

1 Oct 2007

Issue

Issue 3, 14 Oct 2007

Topics

The Singapore economy is rising with the tide of globalisation, but not everyone appears to be prospering equally. A two-speed dual economy appears to be emerging, where divergent growth patterns between different income groups, businesses and even within certain asset classes have become quite stark.1

Closing the door on globalisation is not the solution, as protectionist policies will only hurt overall growth to the detriment of all. Tightening immigration policy, for example, may help protect low-wage jobs but may raise business costs, discourage investment and stifle growth. Fine-tuning the current social support or safety net system is preferable and probably necessary to address some of the negative distributional effects of globalisation.

There appear to be some peculiarities worth highlighting in Singapore’s current social support system. The first pertains to the distribution of social support across the household income dimension, and the second to social support across the business cycle or time dimension. There is some scope to improve the design of social support on both counts.

First, the current distribution system of social transfers is heavily skewed towards the purchase of Housing and Development Board (HDB) flats.2 The most generous government subsidies are HDB housing grants, which provide a S$30,000 to S$40,000 housing grant and a 20% price discount for purchases of new flats.3 These HDB housing entitlements currently dominate payouts from the Workfare scheme.

FIGURE 1. DISTRIBUTIONS OF SUBSIDIES/ENTITLEMENTS ACROSS HOUSEHOLDS-CURRENT (CONJECTURE) VERSUS IDEAL

FIGURE 1. DISTRIBUTIONS OF SUBSIDIES/ENTITLEMENTS ACROSS HOUSEHOLDS-CURRENT (CONJECTURE) VERSUS IDEAL

Plotting subsidies or entitlement (on Y axis) against income (on X axis) will likely produce a skewed distribution with those in the lowest income group getting less government support than those who are slightly better off and able to purchase a HDB flat.

This is because those who are very poor are probably not likely to purchase a HDB flat and exercise their entitlement to the grant and discount. While HDB also offers hefty rental subsidies for lower-income households who cannot afford a basic HDB flat, not all of them may choose public housing. Some may opt to stay with their families or relatives to minimise their financial outlay.


The current system of social transfers is too heavily skewed towards the purchase of HDB flats.

It is probably not ideal to pressure those very poor to commit to the purchase of a HDB property (even with the subsidy) as these households should probably not assume the debt burden and may face difficulties servicing the HDB loan. But should this group be penalised because they are too poor to exercise their privilege? Should lower income households who do not exercise their right to buy a HDB flat be given the lump sum grant of S$30,000 to S$40,000 instead (perhaps into their Central Provident Fund accounts) upon reaching a certain age? Providing such an option may produce an outcome where the subsidy/entitlement is fairer and more a function of need rather than a decision tied to HDB home ownership or consumption of public housing.

The number of lower-income individuals who do not exercise their entitlement to purchase a subsidised HDB is probably not small. Back-of-the-envelope calculations suggest that a current home ownership rate of 93% imply that about 220,000 citizens currently do not live in their own homes. A significant fraction of these may not have exercised or cannot afford to exercise their entitlement to purchase a subsidised HDB flat. Some, but not all of them, may enjoy subsidised rental housing, but the remainder would have lost out in the current HDB-centred social support system because of their financial circumstances.

In the longer-term, a natural evolution will be for the current HDB-centred social support system to shift towards a more Workfare-centred social support system. The Workfare Income Supplement scheme is a significant shift to enhance the social safety net for the lower income segment. Workfare lifts the graph line upwards for the lower income segment, with the largest increases for the poorest segment. The chart line moves closer towards the ideal.

However, the inherent structural weakness of Workfare is that the income support stops during bad times, when such help is most needed. The low-wage workers are moreover exactly the group most vulnerable to layoffs during downturns. Being retrenched is rarely of their choosing and finding a job is especially difficult during recessions.


The inherent structural weakness of Workfare is that the income support stops during bad times, when such help is most needed.

The next recession will be the real test for Workfare. The scheme may have to be fine-tuned to allow for some continuation of an income supplement for some fixed time period upon retrenchment. Some trade-offs will be needed to reach a balance between providing support and minimising abuse.


ABOUT THE AUTHOR

Dr Chua Hak Bin is Director, Asia Pacific Economics & Market Analysis, at Global Capital Markets, Citigroup.


NOTES

  1. This was highlighted in an important Department of Statistics General Household Survey 2005. The report showed that the lower income households saw their incomes falling from 2000–2005, while the top income segments saw a more than 2% annual rise. Income inequality appears to be widening.
  2. The Housing and Development Board (HDB) is Singapore’s public housing authority. HDB’s role, as stated on its website, is to provide affordable and quality homes and to support larger national objectives such as social cohesion and strong family ties. As at 2006, 80% of the resident population own the flat they lived in.
  3. See www.hdb.gov.sg for more details on the complexity of the HDB housing grant scheme.

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