Tharman’s $3100 real median income target: Back to the future?

Singapore Budget 2011 was just released Friday. I have yet to look through all the documents, only focussing on the main highlights on the Singapore Budget 2011 website. At a quick glance much of it looks likes the standard pre-election handout, which Singaporean voters saw in 2001 as New Singapore Shares (NSS) or its 2006 successor Progress Package. Predictably both were given a few months before the General Elections.

One long-term Budget goal in particular caught my attention. It wasn’t a new Budget or economic growth target. It was instead a re-affirmation of a long term economic goal which was first articulated by Finance Minister Tharman back in July 2010. Back then Tharman said that it was tied to the government’s earlier announcement back in Feb 2010 of boosting Singapore’s lackluster productivity by about 2-3% annually over the next decade.

Citing current median wages of $2400, Tharman said that it was the government’s goal to bring that up to $3100 (30% increase) in real terms over the next 10 years. Naturally, such a proposal generated a lot of skepticism amongst Singapore netizens, some of whom claimed that the government would simply reach into its bag of tricks and pull in wealthy immigrants in order to bring up the median income instead of restructuring the economy or establishing social safety nets to do so. Yet for many others, this represented a change from vague promises such as promising to achieve Swiss standards of living, and as mentioned earlier was nothing more than a veiled GDP per capita growth target.

In the same speech, Tharman also announced that employer’s CPF contributions would be increased from 15.5% to 16%, while raising the CPF salary ceiling from $4500 to $5000. This caught my attention and raised the following question. Just how much of the targeted $3100 median wages would come from CPF contributions? The current total CPF contribution rates stand at 36%, which while is comparatively high by international standards of defined-contribution pension schemes, was not as high as the 50% contribution rate which marked the 1980s’ high wage policies.

The high-wage-but-not-so-high-take-home-pay policies of the 1980s

Back in 1979, the government (for the first and only time in Singapore’s economic history) deliberately adopted high-wage policies from 1979-1981 so as to starve out and force the labour intensive but low value-added industries to innovate or outsource their operations out of the country in favour of high-value added capital-intensive industries. This was done by ending generous subsidies for many low-tech industries and the National Wages Council (NWC) explicitly recommending wage increases country-wide in excess of past productivity growth, and by abandoning its 1970s and earlier policy of wage-restraint. In addition, the government also announced that low-skilled foreign labour from countries apart from Malaysia would be phased out by 1984, while also instituting a Skills and Development Fund to be financed by levies on employers.

This goal was itself launched because of the rise of regional economies as well as China (under Deng Xiao Peng’s economic liberalisation program). Today’s goal of boosting labour productivity while raising wages bears eerie similarity to that of the 1980s.

If the results of the early 1980s experiment were any guide as to how much wage increment to expect for the next decade, it must be somewhat disappointing to learn that much of the wage increases were absorbed into CPF contributions, leaving behind much less for disposable income. In the book Wages and wages policies: tripartism in Singapore NTU Economics Professor Lim Chong Yah described the 1980s wage hikes as follows:

To lessen the inflationary impact, employers’ and employees’ CPF increases became part and parcel of the high wage policy. Part of the wage increases was to be siphoned off to the CPF.

…

The take home pay of workers thus did not go up as much as most people thought. Workers’ real take-home pay went up on average by 3% per year for 1979-1981, only about half the rate they received in the recession year of 1985, 6.0%, and much lower than any year after 1988. These facts may come as a surprise to many. However, CPF money was workers’ money. The employees’ CPF contribution rate was raised from 16.5% in 1979 to 18% in 1980 and to 22% in 1980 and to 22% in 1981. The employers’ contribution rate was raised from 16.5% in 1978 to 20.5% in 1979, a very high increase indeed. It stayed at this rate 20.5% through the restructuring years, 1979-81.

…

Thus, although the average nominal gross monthly earnings of workers in Singapore went up by 13.4% per year during the three-year high wage policy period, their nominal take-home pay went up only by 10.1% per year and their real take-home pay went up by only 3.0% per annum … However, if we look at real gross average earnings of employees … the average real wage increase per year for the three-year high wage policy period was 6.0%, from 6.7% in 1979 to 5.3% in 1981.

As the story goes, the wage increases resulted in Singapore’s first post-independence recession in 1985, and an economic committee established that the high-wage policies were largely to be blamed for the supposed loss of economic competitiveness which caused the recession. The NWC’s policy of wage restraint was resurrected and moderate wage increases were recommended only for profitable companies with good prospect. The earlier 1979 goal of phasing out unskilled non-Malaysian foreign labour was abandoned forever.

In other words, much of the wage increases, which were subsequently sucked off into CPF did not manifest itself in take home pay for the workers. Thus, when we see in Singapore Budget 2011 an apparent limited revival of the 1980s high-wage policies, a good question to ask is, exactly how much of the proposed 10-year 30% median wage increase would go into CPF? Now, unlike then, Singaporeans are no longer able to take out all their CPF money due to the establishment of CPF Life and the Minimum Sum, and unless CPF is reformed for the sake of funding retirement for Singaporeans, it’s serves as nothing more than a cheap source of investment funds for GIC.

To add to that, note that a 10-year real 30% median wage increase would amount to a mere compounded annual average of 2.6%, which by itself is already lower than the average take-home pay increment of 3% or higher from 1979-1981 and for much of the 1980s. It’s worth asking in addition if the bar was set deliberately low so that it may be conceivably achieved with much fanfare.

What’s the point of setting a median income goal of $3100 if much of this increase were to end up in the coffers of GIC Singapore for their non-transparent overseas investments? How exactly do Singaporeans benefit when the fixed CPF interest rate of 2.5%  falls below the inflation rate (2.8% for 2010) while GIC reaps the rewards of double-digit investment returns overseas? Are Singaporeans supposed to be happy that GIC’s accounts rather than their own will be topped up? Or that their non-transparent sovereign wealth fund (SWF) would having a windfall for the next ten years thanks to Tharman’s $3100 median income goal?

EDIT: To be fair, I should reiterate that at present it’s not known how much of the 30% increase in median income will be due to CPF contribution hikes.

It’s no surprise that over the years especially in recent times, more and more Singaporeans are questioning if CPF exists to serve their retirement needs or the SWFs which are never held accountable to Singaporeans. For example, a proposed CPF scheme for older low wage workers for unemployment insurance was lauded as “welfarism” when all it involved was a temporary loan one may take from their own CPF accounts to be paid back with interest. Kaffein did an excellent job of exposing this farce, disguised and sold as a generous “welfare” measure here. In due time, perhaps even withdrawing from one’s CPF account will be seen as a privilege rather than a right. Maybe such has already happened.

Update 1: This is to pre-empt anticipated troll-like replies along the lines of “Don’t target median income, complain, target also complain.” To really improve the quality and standard of living the government could target disposable income instead of just income which includes CPF.

References:

Singapore: a case study in rapid development By Kenneth Bercuson, Robert G. Carling

Wages and wages policies: tripartism in Singapore By Chong-Yah Lim, Rosalind Chew, National Wages Council