State Welfare, Singapore Style (and some thoughts on empirically

based welfare policy)

Dr. Walter E. Theseira

Division of Economics

Nanyang Technological University

Welfare in Singapore: The Stingy Nanny – The Economist, Feb 13th 2010

• “FOND of having the last word, Singapore's government can nevertheless be flexible. Who would have thought it would be building casinos? But one policy that shows no sign of reversing is Singapore's antipathy towards public welfare. The state's attitude can be simply put: being poor here is your own fault. Citizens are obliged to save for the future, rely on their families and not expect any handouts from the government unless they hit rock bottom.”

The Singapore Government Response: (Published in The Economist, Feb 17th, 2010)

• “Each society has to decide for itself the appropriate balance between unconditional welfare and self-reliance. Singapore has concluded that we cannot afford European-style state welfare, not because of dogma, but because our circumstances are different…”

• “ Each generation must earn and save enough for its entire life cycle. Our approach is based on time-tested values of hard work, self-reliance, family responsibility and community support for those in need.”

• Many Singaporeans probably agree with the sentiment expressed in The Economist’s article – that the Singapore Government is ‘stingy’.

Is the Government really ‘stingy’?

• Despite this strong rebuttal of “European-style state welfare”, Singapore Government spending has increased significantly over the last decade, with social welfare spending increasing rapidly.

• In particular, social transfers to individuals on a permanent-program basis have increased rapidly. This is significant because this measure of spending doesn’t include ‘one-off’ giveaways like income tax rebates, growth dividends, etc.

Social Spending has Grown Faster than All Spending over the Last Decade

0

10

20

30

40

50

60

70

Total Budget Expenditure

Total Expenditure is 2.14 times larger in Budget 2015

FY 2006 FY2015

0

0.5

1

1.5

2

2.5

3

Social Transfers to Individuals

But, Transfers to Individuals are 4.13 times

larger in Budget 2015

FY2006 FY2015

Introduction of Major Social Welfare Schemes

2007:

Workfare Income Supplement

2012:

GST Vouchers

2015:

Silver Support Scheme

“Singapore-Style” State Welfare Programs Parallel “European-Style” Programs

• WIS: Negative Income Tax / Permanent Transfer Scheme

• GST Vouchers: Broad-based subsidies to essential costs of living (U-SAVE; S&CC Rebates)

• Silver Support Scheme: Minimum Pension Guarantee

• Unemployment benefits: Not implemented, but an obvious remaining welfare pillar. – Singapore’s way: paying employers to keep workers? (Jobs Credit

Scheme during the 2009 GFC; Employment Credits)

• We now spend 0.6% of GDP on social transfers to individuals, as much as

the US spends (as % of GDP) on food voucher programs.

What next for welfare in Singapore?

• Rather than try to push a particular ideology or vision of the ‘welfare state’, I will outline how modern economics research and practice can usefully inform welfare policy.

• I start with the observation that what is taught as economic theory unfortunately often ends up being distorted into ideology.

“Welfare programs reduce incentives to work.”

“Minimum wages cause unemployment.”

Economics and Welfare Policy Design

• As economic theory, these statements are true.

• Yet, they are close to being useless truisms.

• They tell us nothing about the magnitude of negative consequences, or the value of benefits, resulting from welfare policies to society.

The Role of Theory and Empirics in Welfare Policy Design

• Theory provides useful, and testable, empirical predictions on the likely effects of a given welfare policy.

• Economists and policy makers should: – Look to whether these predictions are supported by

the data; – Discard as untrue, or revise theories that are

unsupported by the data; – Revise their thinking on the costs and benefits of

welfare policy according to the evidence.

Evaluating Welfare Policy Design: The Workfare Income Supplement Scheme • Implemented in 2007, the WIS provides cash and CPF

benefits to older Singaporeans conditional on earning a minimal amount of work income

• Costs about $650 - $700 million a year (1% of the annual budget, about half of the total expenditure attributed to the Ministry of Manpower)

• Similar in design to older work-income support schemes in the US (Earned Income Tax Credit) and UK (Working Tax Credit)

Structure of the WIS Scheme

0

100

200

300

400

500

600

700

800

0 200 400 600 800 1000 1200 1400 1500

WIS

Cas

h P

ayo

ut

Income

WIS - Cash Payout (2008)

35 - 44 years

45 - 49 years

55 - 59 years

≥ 60 years

Testable Economic Predictions of the WIS Scheme on Labour Supply

• For existing workers, the income effect predicts a reduction in labour supply, while the substitution effect predicts an increase in labour supply.

• Individuals out of the labour force face only the substitution effect, and so should be encouraged to join the labour market.

• Testable predictions: – Non-working eligible individuals should be incentivised to join

the workforce – Existing workers may work more, or less, depending on income

and substitution effects and the marginal incentives they face.

“The Impact of the Workfare Income Supplement Scheme on Individuals’ Labour Outcomes” – MTI Economic Survey of

Singapore Second Quarter 2014, Feature Article

Evidence from studies on WIS and other Income-Support Programs on Labour Supply

• Introduction of the WIS raised employment rates amongst eligible workers from 2.7 percentage points to 7.3 percentage points. (MTI QES 2014)

• The greatest increase in employment occurred amongst the oldest workers – who get more benefits by design.

• Consistent with evidence from other countries with work-related income support programs – U.S. EITC increased employment amongst single mothers by

2.8pp (Eissa and Liebman 1996) – U.K. WFTC increased employment (also single mothers) by

3.6pp (Blundell, Brewer and Shephard 2005)

WIS enhances labour force participation, but what about labour supply amongst those already employed?

• One prediction is verified: WIS, and similar schemes, result in significant increases in labour force participation.

• What about the other prediction? For existing workers, does WIS result in increases or decreases in labour supply?

• If we go back to the structure of WIS, we’ll see that a far more important feature predicts, quite strongly, a reduction in labour supply amongst certain workers.

WIS benefits look like a ‘hill’ when plotted against income. This is important.

0

100

200

300

400

500

600

700

800

0 200 400 600 800 1000 1200 1400 1500

WIS

Cas

h P

ayo

ut

Income

WIS - Cash Payout (2008)

35 - 44 years

45 - 49 years

55 - 59 years

≥ 60 years

The Implicit Tax inherent to Work Support Programs

• WIS imposes an implicit tax on labour income, as benefits are phased out gradually for incomes above $1,000/mth.

• For example, a 60+ worker faces an implicit tax of 25% on earnings above $1,000. – This is far higher than the marginal tax rate for top income

earners in Singapore!

• As with marginal income tax rates, implicit taxes from

work support programs should reduce labour supply for workers with incomes in the phase-out region.

But, there is little evidence that workers reduce labour supply in response to this type of ‘implicit tax’. Why?

• Workers may not be able to freely choose hours.

• The data is poor at capturing hours worked.

• Or, simply, the details of the marginal fall-off in incentives are too difficult to comprehend for most workers. (Meyer 2010)

• The last explanation is gaining traction as more economists recognize the role of behavioural biases or limited decision-making capability in affecting policy outcomes.

Labour Supply and WIS: Interpretation

• My take is that the general idea that WIS gives out Government money for working (and you get more the older you are) is reasonably well understood.

• This leads to significant increases in employment rates as predicted by theory.

• Nuances of the policy, however, are likely not well remembered, and also not really under the effective control of workers.

Rethinking fundamental assumptions of economics and welfare policy: New Insights from Behavioural Science

• Till now, we have been assuming that economic decision makers are completely rational and perfectly informed.

• Are they? This assumption is tenuous. Research in behavioural economics suggests that real decision makers have limited cognitive ability; decisions are subject to biases and heuristics.

• Why does this matter?

Substantial evidence suggests that those in poverty make bad decisions

Traditionally, some have assumed that people are poor because they make

these bad decisions

Why does this matter?

• A considerable obstacle to more serious efforts to improve the welfare of the poor is the belief that such assistance increases poverty.

• If poverty results from bad decisions, or personal failings, then assistance will only reduce the consequences of those decisions (and, like any other price reduction, encourage more)

• What if this view was mistaken?

Sugarcane farmers in India are generally poor by most standards

But, they go through cycles of debt based on the harvest. They are worst-off just before the harvest…

And better-off immediately afterwards when they sell their crop

Indian sugarcane farmers exhibit dramatic increases in their cognitive

abilities just after the harvest

Why does cognitive ability increase after the harvest?

• Cognitive abilities are a finite resource. (Mani, Mullainathan, Shafir and Zhao 2013)

• Poverty and debt forces people to spend significant mental

effort trying to optimize their limited resources.

• Minor obstacles to many of us (losing a textbook or EZ-Link card) become major problems that take up tremendous attention for the poor.

• In short, perhaps the poor remain poor, because they are mentally incapacitated from poverty itself.

Implications for welfare policy

• While barriers to accessing welfare reduces moral hazard and preserves help for the most needy…

• Such obstacles also increase demands on the limited cognitive resources of the poor.

• Moreover, relieving the most pressing financial needs of the poor could actually help them function better, and become more capable of holding better jobs and making better decisions.

Conclusion

• Singapore’s social welfare spending is likely to be permanently higher due to an aging population and increasing income inequality.

• This requires well-designed social welfare policies that maximize overall benefits for society – driven by theory and empirical research, rather than ideology.

• As economists, we can contribute to this debate. But,

we should also be willing to reconsider some basic assumptions of economic decision-making, based on evidence from behavioural sciences.