Income ceiling and its severe incentive flaws

Jeremy Chen

Recently, I noted a share on Facebook which described the travails of a Singaporean (let us call him Mr T) living in the northern part of Singapore who was unable to secure housing from the HDB due to “being above the income ceiling”. According to the HDB, Singaporeans are not eligible to rent from the HDB if their household income exceeds $1,500 per month.

Some might say that Mr T’s case is not very strong, and that there would be many more in even more severe situations than him. However, this does not mean that Mr T’s case does not merit attention.

The SDP raised this problem in Annex B of
Housing A Nation: Holistiic Policies For Affordable Homes and also in the article
Beyond the income ceiling: Extending the public housing franchise. For clarity, I will repeat the argument made.

This translates into practical problems for lower-income Singaporeans. Last year,
The New Paper published a report titled ”
$50 raise? No, thanks” (2 July 2012) wherein it highlighted the case of a low-wage earner turning down a pay increase as it would have put her in a higher income bracket which would have led to a net loss after accounting for the increase in rent.

The problem exists not just from rental flats but also for purchase of BTO flats. HDB’s rules state that if a household’s income is $1,500 and below, a family is eligible for a grant of $40,000 for a BTO flat. If the income is between $1,500 and $2,000, the grant falls to $35,000.

Consider the situation where a household is close to some income ceiling, say $1,480. If the family’s income is raised by $50 a month, the increment puts the family above the ceiling and disqualifies it from the higher subsidy of $40,000.

The monetary benefit of an increase in income by $50 per month is small compared to a decreased grant subsidy of $5,000. Is an additional $50 per month in salary worth as much as $5,000? Young people are also warned to ballot for their flats early before they reach the income ceiling. This goes to show that these incentive issues are real and should be properly addressed.

The real harm of “income ceilings”

Housing a Nation, we highlighted the income-ceiling problem where grant subsidies fall significantly, inducing a series of disincentives for lower-wage workers to accept wage increments or take on higher value work for fear of sharp drops in their HDB grants. Economically speaking, this doesn’t make sense.

In the Perspectives article
Beyond the income ceiling: Extending the public housing franchise, I discussed the income-ceiling problem for middle-class Singaporeans whose household income approaches $10,000 (for 4-room and bigger flats, and selected types of 3-room flats). Singaporeans in this category are caught in a bind because  private housing (and even Executive Condominiums) are beyond their reach. 

In such cases, households are presented a massive disincentive to take on higher value work. Such barriers disincentivize productivity increases for the national economy. (Academic economists who are interested in using structural modeling techniques to identify the presence of and the strength of such incentive effects might find this to be a worthy and impactful research project.)

In the aforementioned article, I touched on a possible solution for the middle-class income-ceiling problem. It is similar in spirit to the rental problem that Mr T faces.

The solution is to allow him to rent, but charge him a bit more.
While preference can be given to households with even lower incomes, a soft relaxation of the rule prevents precipitous welfare losses. Of course, rental rates should increase gradually with household income but not at a rate so fast as to make it not worthwhile to pursue higher income.

(Of course, introducing such measures would necessitate a thorough evaluation of of pricing for housing and rental which the SDP has done in
Housing a Nation. Making flats affordable for Singaporeans especially those in the lower-income groups would reduce long waiting lists for rental housing.)

It is unfortunate that the Government, with all the economists in its ranks (several of the cabinet ministers have had training in economics), would have
designed so many rules around the flawed income ceiling dynamic. The question really is: How did they miss the problem?

Jeremy Chen is pursuing his PhD in Decision Science at the NUS and is a member of the SDP’s housing policy panel.

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