Reducing inequality

Mar 09, 2013

POLITICS 360

Narrowing the income gap will help citizens feel more invested in S'pore

By Fiona Chan Senior Economics Correspondent

MUCH of the recent discussion over building a more inclusive society in Singapore has focused on narrowing the income gap, and for good reason.

The chasm between top and bottom earners is not only widening, but also nearing its worst levels in more than a decade.

In the 2012 household incomes survey released last month, there were no fewer than seven calculations of the Gini coefficient, a measure of income inequality. They reflected different computation methods and components, such as Central Provident Fund (CPF) contributions and government transfers and taxes.

All seven calculations showed that Singapore's Gini coefficient was higher last year than in 2011. Depending on the metric, each was also at its highest or second-highest level since 2000, the earliest date given in the survey.

On the heels of this, the Government took bolder steps in last month's Budget to close the income gap from both ends. It gave more handouts and rebates to the needy and raised or imposed new taxes on luxury houses and cars.

Some MPs have called for an even greater rebalancing of wealth, with higher taxes at the top end. There is some merit to this argument, especially since Singapore's income distribution has become considerably more top-heavy in the last decade.

Since 2000, the number of households earning $13,000 or more a month has quadrupled, from about 64,000 in 2000 to about 250,000 last year, according to the household incomes survey. Their share of the population has also tripled. Only one in 14 households made such big bucks in 2000, but this grew to one in five households last year.

At the same time, top earners are also raking in more. The top one-tenth of households now earn above $30,000 a month on average, up from $16,000 in 2000 - a near doubling of incomes.

But the rise in incomes gets smaller and smaller as one goes down the economic ladder, until it plummets right at the bottom.

For most households, their wages grew by between 60 per cent and 73 per cent over the last 12 years, or 5 per cent to 6 per cent a year on average.

But the lowest one-tenth of households have seen a measly 19 per cent rise in incomes since 2000 - just 1.6 per cent a year on average. Inflation has averaged 2.1 per cent a year in this time.

To its credit, the Government has tried to ameliorate the widening disparity. The top 10 per cent of households earned nine times the takings of the bottom 10 per cent of households last year, but only 7.87 times after including government transfers and taxes.

Still, that was up from 7.54 times in 2011, and higher than the 7.68 times in 2000.

This is ample ammunition for those who propose a more progressive tax system. However, it must also be balanced against the risk of Singapore losing its competitiveness against a rival like Hong Kong, whose top taxes are already lower than Singapore's.

But economic equality is about more than just closing the income gap for workers. It also means reducing the growing sense of financial division between the richest and the rest, both through more aid for non-workers and through policies that refrain from exacerbating existing wealth disparities.

The clearest picture of this is in transport. At one end of the spectrum, elevated inflation has made public transport costs an increasingly unaffordabledaily expense for poorer citizens, who expressed disappointment at having no new transport subsidies in the Budget.

These include households for whom greater wage equality may not come in time: Those with no income at all, such as retirees, and older low-wage workers, whose remaining salary rises may well be outpaced by inflation.

Nearly a tenth of households had no working person last year, a rise of 35 per cent from 2000, the household survey showed. Retiree households, in particular, have doubled in the last 12 years. There were 69,100 of them last year - 6 per cent of all households.

Most retirees are likely to be living off fixed savings, which will be more quickly eroded now that Singapore is moving into an era of higher-than-usual inflation.

Even for senior citizens who are still working, the prospects of meaningfully higher retirement savings are slim for many.

Of the lowest one-fifth of income earners, almost half are citizens aged 55 and above, Finance Minister Tharman Shanmugaratnam noted in his Budget speech.

For workers aged 60 and above, a quarter of them, or about 46,000, toil as cleaners or labourers - the lowest-paying jobs, according to June 2011 data from the Manpower Ministry.

The median monthly basic wage for these jobs was just $900 in 2011, the latest figures available. Office cleaners, the bulk of this category, earned a median monthly basic wage of only $760.

Among other aid for older workers, Mr Tharman has restored their CPF contributions in the latest Budget. But the numbers are not particularly cheering.

A 45-year-old earning $800 a month will save $15,000 more in his CPF by age 65, Mr Tharman said. Assuming the worker spends $650 a month in his retirement, these 20 years of extra CPF savings buy only two more years of monthly expenses before taking into account any state transfers.

At the other end of the income spectrum, transport is also driving a deeper wedge into the rich-poor divide - or, rather, the rich-middle divide. The recent cap on car loans means that even a middle-class income may no longer be enough to buy a car.

A basic new Japanese or Korean car will cost about $120,000 or $1,310 a month, based on a 40 per cent down payment, 1.88 per cent interest rate and five-year loan.

The rule of thumb is: A household's debts - including car and house loans - should not exceed 35 per cent of its monthly income.

Assuming the car loan repayments make up 10 to 15 per cent of household income, that puts this car out of easy reach for some 60 per cent of households, even before counting the cash down payment and running costs of the car.

Meanwhile, judging from the reactions of wealthy individuals, the loan limits and higher car taxes are but minor obstacles to their habit of owning multiple cars.

Given high car prices, some loan limits may be in order to ensure financial prudence. But a less inequitable policy could have been to impose lower loan caps for a first car and more prohibitive taxes or loan limits for subsequent car purchases.

As Singaporeans grapple with the cost of living and the meaning of home, a movement towards greater equality will be crucial in both discussions. Policymakers would do well to remember that one type of equity begets another: A greater sense of inclusiveness will make Singaporeans feel more invested in this country.