Welfare traps in Singapore
How Singapore's system of social welfare keeps people poor
Happy belated May Day! In commemoration of this national holiday celebrating the contributions of the labour class, let’s talk about how Singapore’s social welfare programs keep people in poverty. (…yay?)
As is commonly defined, a welfare trap is a system of social welfare which incentivizes people to remain on social welfare programs. This is typically because finding a job or bettering one’s income would mean becoming ineligible for means-tested benefits, resulting in either no significant increase or a net reduction in total income. The opportunity cost of getting a job is too high for the expected financial return. As a result, lower-income individuals are incentivized to remain lower-income because of the program purporting to assist them.
This is all well and good, but rather general and abstract. So, as a specific example of such a welfare trap in the Singapore context, let’s take a look at HDB’s Public Rental Scheme.
The Public Rental Scheme (PRS)
Despite its seemingly general name, it is specifically stated on HDB’s website that the PRS is “meant for lower-income Singapore Citizen households with no housing options or family support”. In essence, it’s social welfare in the form of a rental subsidy. If you can’t own an HDB and can’t otherwise afford rent, the PRS pretty much the only option left.
In Mar 2020, then-Minister for National Development Lawrence Wong said there were about 50,000 PRS households in Singapore (this was in response to a parliamentary question from then-NMP Anthea Ong). Note that he didn’t actually answer the further details about how many people are in each flat on average… So let’s just estimate 2-3 per household, so around 100-150k people staying in PRS flats? That’s the same number of people as the entire population of Ang Mo Kio (based on numbers from here), so it’s not a small number.
As always, social welfare in Singapore is thoroughly means-tested. The eligibility requirements for the Public Rental Scheme state that total household income shouldn’t exceed S$1,500 a month. The following table shows what rents are like for staying in a PRS flat.
Frankly, this seems like an overly low household income. After all, a single individual working full-time at a fast-food restaurant would be paid close to the income cap already, and we’re talking about household income.
But the benefits of qualifying for the scheme are enormous. Simply renting a room in Singapore is often around S$700-S$800 a month. Renting a small flat would easily be over S$1,200 a month. Being able to keep the rent down by about S$600-S$1,000 a month is massive. Thanks to the PRS, a low-income household would probably be able to make ends meet (barely). It’s a rather rare thing to find an example of Singaporean social welfare that actually makes a big difference.
But then what happens when household income increases, exceeding the eligible limit?
Monthly expenses would immediately skyrocket. Instead of needing S$1,500 every month, this hypothetical household would now need S$2,100-S$2,500 to cover the bills. If the income increase was a small incremental increase like, say, S$100 (as it is likely to be), you would have less money as a result of increasing your own income!
The only way to increase the net take-home household income is for your income to jump by the amount that the PRS helps you save. That is, for your income to suddenly jump by S$600-S$1,000 from one month to another.
Achieving such a hefty income jump is likely next to impossible. But even if it was possible, it may not even be worth it! After all, the higher income likely comes with significantly increased job stress, and your bank account balance won’t look any different once the higher rent payments hit.
So why would anyone try to better their own circumstance and make more money? Classic welfare trap.
Preventing the welfare trap
This is, of course, just one social welfare program. I tried looking around for other examples I could use as well, but this proved to be to no avail. Why? Because the rest contribute out too little to matter! A few hundred dollars a year for medical expenses as part of CHAS isn’t even equivalent to one month of income.
While looking for other examples, though, I did come across one scheme that seems to have been designed to avoid creating a welfare trap.
I’m talking about the Workfare Income Supplement (WIS) Scheme, run by the Ministry of Manpower, CPF, and Workforce Singapore. Now, it’s not a particularly generous program. For a worker within the age range of 35-44, your WIS payments max out at S$142 a month, with the majority going into CPF. You can’t exactly pay for food with CPF, can you?
The payments are slightly better for older workers, maxing out at S$333 a month for those over 60. This is the absolute best you can get from the WIS scheme, and that’s just half that of the PRS. Furthermore, the PRS saves you cash; the WIS gives you cash and CPF. So the WIS isn't a particularly outstanding scheme, all in all.
But, credit where it’s due, as WIS payouts avoid the welfare trap. If you make less than S$1,200 a month, increasing your income actually increases your WIS payout, creating the reverse of the welfare trap - you are encouraged to raise your income! At income ranges between S$1,200 to S$1,500 a month, WIS payouts remain the same throughout, so there's no negative impact, income-wise. WIS payouts don’t simply fall off a cliff after that point either. They gradually decrease, eventually reaching zero at an income of S$2,300. This means that you still get about 60-80% of the increased income. Arguably more, since the proportion of that which goes towards CPF will be smaller.
Ignoring the tiny payout size, this is a great concept! Workers would still have an incentive to try to raise their incomes without being penalized for incremental gains, unlike the PRS. This scheme isn’t perfect by any means, but it’s a good demonstration of how to avoid the welfare trap.
A similar concept should be applied to other Singaporean social welfare programs, with benefits being gradually reduced as circumstances improve, rather than being withheld all at once. This would avoid the welfare trap, making it easier for those who are lower-income to gradually improve their lives.
All-or-nothing social welfare programs alongside rigid means-testing create a set of economic incentives that don’t encourage upwards income growth. This May Day, let’s think about whether the policies we put in place actually serve the workers, or keep them trapped.
Very late post this week, whoops.
~ Kai