Will the Workfare Income Supplement and Wage Credit Scheme Help Singaporeans?

In Budget 2013, the government announced or enhanced 3 initiatives to boost the incomes for lower income earners.

  1. Workfare Income Supplement (WIS) Scheme: The Government will enhance the WIS scheme in 2013, to further supplement the income and savings of low-wage workers, as well as encourage them to remain in the workforce. The enhanced WIS is expected to benefit about 480,000 workers, and will cost the Government about $650 million per year.
  2. The Wage Credit Scheme (WCS): Part of the 3-Year Transition Support Package introduced in Budget 2013. Under the WCS, the Government will co-fund 40% of wage increases given to Singaporean employees earning a gross monthly wage of up to $4,000. WCS covers wage increases that are given in 2013 to 2015.
  3. Increase in CPF Contributions: With more cash from WIS and other measures to improve employability in place, there is scope to increase the CPF contribution rates of low-wage workers so that they save up more in their CPF. To this end, the CPF contribution rates for employees earning >$50 to <$1,500 will be revised upwards from 1 January 2014 as follows:
    1. The Employer CPF contribution rates for employees aged above 35 years and earning >$50 will follow the existing rates of employees earning ≥$1,500.
    2. The Employee CPF contribution rates for employees earning ≥$750 will also follow the existing rates of those earning ≥$1,500. The rates for employees earning >$500 to <$750 will be phased in. There is no change for employees earning ≤$500, who are not required to make employee CPF contributions.

In this article, we will look into the impact of these schemes for the low wages workers.

If you look at Table 1, you can see the WIS payouts for last year. You can also see in Chart 1 the comparison in the chart. Note that the WIS payouts listed here are annual amounts.

Employee WIS 2010

Table 1

Slide1

Chart 1

You will notice that the WIS gives higher payouts to older workers. Those 60 and above are given the highest payouts. So, does this mean that the WIS benefits older workers more? We will look further into this later.

Oddly, you can see that the WIS payouts increase as the worker earns a higher income, up until the $1,000 wage point, where the payouts thereafter decreases.

Logically, one would expect that the WIS payouts should be at the highest for the lowest income earner, at $200, and thereafter decrease as the worker earns a higher income, as in Chart 2. However, this is not the case.

Slide2

Chart 2

There could be several reasons:

  1. According to the Ministry of Manpower, “The large majority or nine in ten of the employed residents were working full-time in 2011, though the number of part-timers continued to rise from 176,700 or 9.0% of employed residents in 2010 to 194,700 or 9.7% in 2011. Also, the median gross monthly income is $2,925 for full-time workers and $750 for part-time workers (excluding Employer CPF). According to the CPF, there are 294,364 Singaporeans who earn less than $1,000 per month. Supposing that about 190,000 of them work part-time and
  2. Since there are 194,700 part-time workers and the median wage for part-time workers is $750, we can broadly assume that part-time workers constitute a large proportion of the low income earners. If this is the case, the WIS payouts might thus have been computed according to the hours worked, with those working lesser hours being given a lower payout. Having said that, there is also a significant proportion of full-time workers who earn low wages.

Slide3

Chart 3

  1. Another way that the WIS payouts might have been computed could be according to the number of workers. If you look at Chart 3, according to CPF, you can see that among workers who earn a low income of less than $1,000, there is a higher concentration among those earning between $800 to $999. And if you look at the WIS payouts for those earning a wage of up to $1,000 (Chart 4), you can see that the WIS payouts also increase towards the $1,000 income mark – the charts follow a similar progression. Are the WIS payouts higher in the higher low income wage brackets, because there are more workers in these brackets? Even so, it doesn’t make complete sense, because it should mean that for those earning the lowest wages for full-time work, because there are lesser workers, we should be able to give them higher WIS payouts since the lesser numbers should not make as significant a dent in the budget.

Slide4

Chart 4

  1. A third way to look at how the WIS payouts are computed is this – the government wants to be targeted in the support they give to low income earners to lift their wages. The government might have decided that it would be too costly to lift the wages of all the low income earners and might have wanted to be targeted in those who receive assistance. Looking at the WIS payouts which max at $1,000, you can assume that the government might have computed an ‘unofficial’ minimum wage of $1,000, which they believe Singaporeans should earn. Working backwards, the bulk of low income earners earn between $800 to $999, and so the WIS payouts might have been targeted at them, to lift their wages upwards, to as close to ‘minimum wage’ as possible. The WIS payouts might be increased subsequently for the lowest income workers in future to bring their incomes to parity.

Workfare Income Supplement

In Chart 5 and 6, I had extracted the data for workers aged 35 years old (Chart 5) and aged 65 years old (Chart 6) to look at how the WIS would impact on the income of the workers. For example, for a 35 year old who earns $200, with WIS, he can take home a pay of up to $209, after CPF deductions, whereas for a 35 year old who earns $2,000 and who does not receive WIS, he takes home a pay of $1,600.

(Note: I had computed the CPF amounts according to the CPF Contribution Rates as stated here. For the computation of the WIS payouts, I had divided the annual payouts by 12, to obtain a monthly payout amount.)

Slide5

Chart 5

Slide6

Chart 6

You can see that WIS benefits the older workers more because for a 65 year old, if his salary is below $1,000, his take home pay is equal or more than what his salary is, after CPF deductions, whereas the same applies for a 35 year old, only for a salary of up to $400.

On the surface, it seems that WIS is more beneficial for the older workers. But is this so?

If you look at the total income of workers aged 35 and 65 years of age in Chart 7, you can see that given that both the workers in the different age groups earn the same salary, their total income (including CPF and WIS), for the older worker, is actually lower, generally speaking.

Slide7

Chart 7

In Chart 8, you can see that in terms of take-home income (after CPF deductions), the older worker actually takes home a higher income, which seems to be good.

Slide8

Chart 8

But when you look at Chart 9, you will see that older workers have a much lower income in their CPF.

Slide9

Chart 9

Finally, in Chart 10, you will then be able to understand why the WIS gives a higher payout for older workers, but the thinking is not because the older workers need to be given a higher total income for retirement, for the WIS is really meant to cover up for the shortfall in income from CPF, and even so, the older worker still doesn’t earn an equal salary, as compared to a younger worker, as Chart 7 has shown.

Slide10

Chart 10

This is worrying though, because as much as the government continues to want to encourage our older workers to work, our older workers aren’t treated fairly and are not given an equal pay. This is especially worrisome because the older workers will be reaching retirement soon, where they would need more savings after they retire. Yet, not only are they not paid more as they grow older, but are actually paid less, and their incomes also remain stagnant throughout their work life, if they earn a low income. This means that our older workers are trapped in a chronic state of poverty, which renders them having to work even long after their retirement age, because they are simply not accorded enough to retire.

The government might have lowered the CPF contributions, so as to allow for the older workers to have a higher take home pay. Even then, the take home pay isn’t significantly much higher and doesn’t compensate for the loss in CPF.

Also, the government might have reduced the proportion of CPF contributions by employers for older workers, because the thinking might be that employers might not be keen to hire older workers, so if the employer needs only contribute lower amounts to the CPF of older workers, it might give more incentive for employers to hire older workers. The government might have thus decided to chip in with the WIS, to top-up the pay of older workers. Even so, could the government do more by increasing the WIS payouts for older workers?

And so, this was what the government has decided to do in Budget 2013. In Chart 11, you can see the increase in WIS payout in 2013. Let’s look at the effects.

Slide11

Chart 11

How does the increase in WIS payout impact on the low income workers?

In Chart 12, you can how the WIS affects the low income worker who earns $1,000, across the different age ranges, prior to the increase WIS payout in 2013. Strangely, at the same salary level, a worker at 45 years old earns a lower total income than a worker at 35, and a worker at 65 earns a lower total income than a worker at 55.

Slide13

Chart 12

In Chart 13, you can see the increase in total income for the lower wage worker after the increase in WIS payout in 2013 and the increase in CPF contribution rates in 2014. Strangely again, the worker at 65 earns a lower total income than the worker at 55.

(Note: I had computed the CPF amounts according to the CPF Contribution Rates in 2014 as stated here.)

Slide14

Chart 13

Chart 14 shows the comparison of the total incomes for a salary of $1,000 at different age groups, before and after the increase in WIS payout in 2013. Note that the total incomes also reflect the change in CPF contributions.

Slide15

Chart 14

For the 35 year old, his overall total income will increase by 2.3%. For the other ages, their overall total income will increase by 7%, though the income increase is highest for the 45 year old, by 7.2%. The income increase for the 65 year old is 6.8%.

Would this be enough for the lower income workers? I would argue, though, that more top-ups could be given to the worker, as he grows older, because if the low income worker has been subjected to low income throughout his work life, then more needs to be given to compensate for the lack of growth of his income, to counter for the depression of his wages and the significant increase in inflation. Can more increases by made to the WIS payouts for older workers?

The government had also said that more WIS will be given out in cash. “Employees will receive 40% of their WIS payouts in cash, an increase from less than 30% today. Self-employed persons will receive 10% of their WIS payouts in cash. Previously, WIS for self-employed persons was paid entirely into their Medisave accounts.” However, even as the government pays out more WIS in cash, the government absorbs some of this payout into higher CPF contribution rates for low income workers.

We have seen this happen in 2007, where “the CPF contribution rates for low-wage employees were reduced in 2007 together with the introduction of WIS. The employer’s share of the CPF contribution rates for employees aged above 35 years and earning <$1,500 per month were reduced to increase their employability. The employee’s share of the CPF contribution rates of all employees earning <$1,500 per month were reduced to increase the take-home pay. The introduction of WIS, which is partly paid into CPF, made up for the cuts in CPF contributions.”

Thus in 2013, the government says that, “with more cash from WIS and other measures to improve employability in place, there is scope to increase the CPF contribution rates of low-wage workers so that they save up more in their CPF.”

I am not sure how helpful this is because upon retirement, it is still difficult for the low income worker to withdraw his CPF monies because he would need to set aside a minimum amount in his CPF before he is able to withdraw. However, if the worker has been receiving a chronic state of low income, will he have sufficient to withdraw from his CPF? It is still ‘safer’ for the low income worker to have cash in hand, because of the restrictions put in place for the withdrawal of CPF. Otherwise, the government would need to reform the CPF system or increase the interest earned for older workers in the CPF.

Wage Credit Scheme

To look at the effects of the WCS, we can track the progress of a worker over 3 years.

In Chart 15, if you look at a 35 year old who was earning a salary of $1,000 in 2012, you can see that his total income will increase from $1,248 to $1,451. This is assuming that the worker receives an increment of $50 every year from 2013 and 2015, because, employers are required to give “at least a $50 increase in gross monthly wage to Singapore citizen employees earning up to $4,000” to qualify for WCS. Thus assuming that the employer gives the minimum increase to the worker, his total salary will increase by 16% by 2015.

Slide16

Chart 15

In Chart 16, you can see that for a 65 year old who was earning a salary of $1,000 in 2012, if he receives the minimum $50 wage increment from 2013 to 2015, his total income will increase from $1,275 to $1,522, which is a 19% increase. Also, for the 65 year old, he would be able to take home an income which is on par or higher than his salary, which the 35 year old could not.

Slide17

Chart 16

At this point, it might seem that together, the WIS and WCS might actually benefit the older low income worker, to a certain extend.

However, the question is, how will employers use the WCS?

Optimally, for the WCS to be able to effectively reduce income inequality, bigger wage increments should be given to the lower income workers, and smaller wage increments should be given to the higher income workers, as in Chart 17. In this illustration, the lower income workers would receive a $350 increment annually, while the higher income earner would receive an annual $50 increment.

Slide18

Chart 17

However, what is more likely to happen would be the other way round, as in Chart 18, where employers would give larger increases to higher income workers, to reward their ‘higher’ skill sets, where the higher income workers, in this illustration, would receive an annual $350 increment, while the lower income workers would receive an annual $50 increment.

Slide19

Chart 18

In the optimal scenario, income inequality will be reduced, where the higher income earner would earn 2.5 times more than the lower income earner. However, in the more likely scenario, the income inequality would have grown the higher income earner would earn 6.7 times more.

You can see a clearer comparison in Chart 19.

Slide20

Chart 19

Essentially, what the WCS hopes to achieve is what Prof Lim Chong Yah had prescribed as ‘shock therapy’, where he had recommended to implement a “wage freeze for top earners while raising incomes for the poorest by … 15 per cent in each of the first two years and 20 per cent in the last year.”

The philosophy behind the WCS aims to replicate this, without an affirmative policy which employers would be held accountable by. Employers have to increase an employee’s salary by at least $50 to qualify for the WCS. Also, the WCS is applicable only for workers who earns a gross monthly wage of up to $4,000. Essentially, this is a cap which is aimed at motivating employers to increase wages for those earning below the range of the top earners.

However, the WCS might falter because first, employers are still more likely to reward those with ‘higher’ skills, rather than those who work in jobs where the perception is that the skill sets cannot be much improved. Also, employers of low income workers will need to increase by more than the minimum $50 requirement for workers to see a significant leapfrog in their incomes. Third, as there is no barrier placed for the growth of the incomes of the top earners, income inequality will still continue to exacerbate, because the top earners will continue to receive significantly more wage increments than those who are targeted to benefit from the WCS.

Minimum Wage to Be Imposed in 2016?

Essentially, what the WIS and WCS combined, hopes to do is to increase incomes significantly that by 2016, a minimum wage can be imposed.

If the WCS can increase the wages of lower income workers by $150 by 2016, for those earning $850 and above, their wages should have increased to at least $1,000 by 2016. This would mean that the about 100,000 workers who currently earn between $800 to $999 would have seen their wages uplifted to be above $1,000 by 2016, as can be seen in Chart 20.

Slide21

Chart 20

By this time, not including the part-time workers, there might be only about 30,000 to 40,000 workers who earn less than $1,000. By 2016, with a much reduced pool of low income workers, it might be a better time for the government to impose a minimum wage of $1,000, so that even if businesses would need to make adjustments, there would be fewer companies and fewer workers who be affected, as most of them would have already seen their pay increase over the minimum wage by then.

Conclusion

In summary, the WIS and WCS are unique schemes to boost the wages of the low income workers. However, these schemes are not sustainable in the long run, as wage adjustments should eventually be a function of equitable transfer of costs and profits by the businesses to workers, with minimal over-regulation. In the medium term, the government should aim to reduce the over-reliance of additional schemes to boost wages, which thus explain why the WCS has been set for a 3-year period.

Importantly, even after the WIS and WCS top-ups, the older low income workers aren’t still much better off, when taking into account that their wages have been depressed for the large part and that they would be retiring soon. More targeted intervention needs to be focused on the older low income workers to ensure that their wages are further boosted, through higher increases in the WIS and more favourable criteria for the older low income workers in the WCS.

Also, to be clear, wages for the low income workers have been depressed for more than a decade, so even if a minimum wage of $1,000 is implemented, there would need to be at least another two or three subsequent increases to the minimum wage to ensure that the minimum wage is pegged against the eventual corrected wage. Thus in the medium term, the WIS will continue to match the incomes of low income workers to the ‘optimal’ wage at each point, and the WCS might be extended for another few years to cater for further wage corrections after 2015.

On the whole, if we look at the WIS and WCS from a longer term perspective, they could be intended to phase in structured and systematic increases in the wages of low incomes workers, without unduly causing stress among businesses, by giving businesses the free rein to manage their costs.

If businesses understand the government’s strategy correctly, they would understand that the government would expect that the wages of workers should increase by at least $150 for the next 3 years. However, this is to note that the $3.6 billion that the government has set aside will more than allow for just $150 increments over 3 years. On the flipside, if the $3.6 billion is used up before the 3-year period, will the government top-up the funds to match the shortfall?

For some businesses, they might not take advantage of the WCS in the first year of the scheme, as they might take a wait-and-see approach to see if the productivity initiatives that they would adopt in 2013 would take effect. They might then give larger increases in 2014 and 2015, to compensate for the lower wage increment in 2013. However, I think it would be more likely that businesses will increase their workers’ wages by at least $50 in the first year, to take advantage of the cost savings, and then give possibly higher increments in 2014 and 2015.

However, if businesses are reluctant to give any significant increments between 2013 and 2015, and choose not to take advantage of the WCS, and if they are a business which employs low income workers, I believe that they will expect to be in for a huge shock in 2016 when the government takes affirmative action to uplift the wages of the low income workers.

But – if PAP does not implement a minimum wage by 2016, then they will be in for a rude awakening when PAP loses the right to form the government for the first time in Singapore’s history.

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