Income vs Wealth inequality in Singapore

In discussions of economic disparity, two terms frequently arise: income inequality and wealth inequality. Though related, they illuminate different aspects of financial health and societal equity. Understanding the nuances between these two forms of inequality is crucial for addressing the economic challenges that cities and countries face today.

Income Inequality: A snapshot of Earnings

Income inequality refers to the uneven distribution of earnings among individuals and households within a society. It encompasses wages from jobs, dividends from investments, and profits from various business activities. This form of inequality is a natural economic phenomenon, influenced by a multitude of factors including education, industry, economic policies, and labour market dynamics.

The disparity in income is significant because it directly affects an individual's or household’s ability to afford essentials such as food, housing, and healthcare. Any income beyond these necessities might be directed towards luxuries or savings, the latter potentially being funnelled into investments. However, even within societies that show moderate levels of income inequality, the capabilities of individuals to save and invest can vary dramatically based on their earnings.

Wealth Inequality: Long Term Accumulation

Wealth inequality, by contrast, refers to the differences in the accumulated assets among individuals or households. This includes savings, properties, stocks, and inheritance. Unlike income, which can fluctuate over short periods, wealth typically accumulates or depletes over a longer duration and can be passed down through generations.

This form of inequality is often much broader than income inequality because it compounds over time. Those who are able to save and invest effectively see their wealth grow exponentially thanks to mechanisms like interest, dividends, and capital gains. Conversely, those without surplus income remain stagnant, lacking the financial leverage to build wealth. This dynamic fosters a cycle where "the rich get richer, and the poor stay poor," extending the wealth gap across generations.

Compounding Factors and Societal Impact

The divergence between income and wealth inequality is not just a matter of numbers but a reflection of deeper systemic issues within societies. Wealth inequality raises significant concerns because it signifies not just current economic status but historical, systemic advantages or disadvantages that accumulate over time, often exacerbated by policies and tax systems that favour wealth accumulation for those already financially secure.

Addressing these disparities requires nuanced strategies that go beyond immediate fiscal policies. While efforts to mitigate income inequality through progressive taxation and wage policies are vital, tackling wealth inequality demands more structural interventions. These might include estate taxes, higher taxes on capital gains, and policies aimed at boosting the initial capital abilities of lower-income households, such as grants for home buyers, educational bursaries, and retirement savings contributions.

In any discussion on economic inequality, distinguishing between income and wealth disparities is crucial. Each has distinct implications for social stability and economic policies. By understanding the root causes and effects of both types of inequality, policymakers and communities can better strategize on how to build a more equitable economic landscape.

Income and Wealth Inequality in Singapore

Singapore has a reputation for being obsessed with global rankings; more specific to this article, Singapore has been ranked one of the richest countries as well as one of the most expensive countries to live in. The combination of which has led many Singaporeans to believe that inequality in Singapore is also very high; and some have sought policies changes from the government to address these inequalities.

The first step to solving a problem is to define the problem and assess if it is indeed a problem. We have established that income inequality is a natural economic phenomenon, influenced by a multitude of factors including education, industry, economic policies, and labour market dynamics. But how much income inequality can society endure before it becomes a problem. Wealth inequality is often much broader than income inequality because it compounds over time; but again, how much before it becomes a problem for this or the next generation.

Income and wealth share by the rich - Comparisons

Based on data from the World Inequality Database, did you know…

The top 1% make up 14% of total income in Singapore, while the top 10% make up 46% of total income in 2018.
- The share of income by the top 1% and 10% fell significantly due to redistribution policies related to the COVID19 pandemic.
- While this gives us some idea of the state of inequality in Singapore, it lacks context to determine if these numbers are of concern.
Singapore being a city state, it may not be fair to compare Singapore to countries who have multiple cities, urban and rural areas. A city to city comparison is probably more fair; but city level income and wealth inequality data are hard to come by.
- Singapore’s income share of the top 1% and 10% is significantly lower than many other comparable cities such as New York, New Jersey, Hong Kong, Taiwan and the world average.
- Singapore’s wealth inequality is right in the middle of many of the Asian Tigers. The share of wealth held by the top 1% and 10% is similar but higher than Taiwan and Macao but lower than Hong Kong and the World.

Based on the data, the share of both income and wealth does not appear to be significantly higher than comparable cities. Data further suggests that this is part and parcel of economic reality.

Measuring Income and Wealth Inequality

While there are many methods of measuring inequality, we are limited by what is available in the World Inequality Database we will be comparing the ratios of income of wealth between the top 10% vs the bottom 50%.

Data from the World Inequality Database shows that

Singapore’s income share of the top 10% is between 1.5 to 2.8 times higher than the bottom 50%, after and before the COVID19 pandemic income redistribution policies.
- It suggests that Singapore’s income inequality is higher than many developed Western European countries, but lower than Hong Kong, Taiwan and the USA.
Singapore’s Wealth share of the top 10% is about 15 times higher than the bottom 50
- Again, this is higher than some developed Western European countries (Denmark, Belgium, Norway)
- But it is lower than Germany, Finland, Italy, USA and the world.

So what?

To assess if Singapore income and/or wealth inequality is too high, we must first establish what level of inequality is considered too high or too low. And Singapore should not choose to lower (or increase) inequality as a goal unto itself, it should be an intermediate goal towards something bigger.

The notion of an "optimal" level of income and wealth inequality is complex and nuanced, reflecting various economic, social, and ethical considerations. Research suggests that some level of inequality can be beneficial for economic growth and innovation, as it can motivate individuals to strive for better economic outcomes. However, excessive inequality can undermine social cohesion, reduce social mobility, and even hinder economic stability and growth.

Globally, there's no consensus on an exact "optimal" level of inequality. Economists like Thomas Piketty have suggested that moderate levels of income inequality might stimulate economic activity, but when inequality reaches extreme levels, it can lead to economic inefficiency and social unrest. This is seen in the Scandinavian countries, which have implemented policies to maintain relatively low levels of inequality, balancing social welfare with economic incentives(SpringerLink).

Moreover, a study highlighted by the Harvard Business Review suggests that the relationship between inequality and economic growth is nonlinear, meaning that while some inequality can be beneficial up to a point, beyond that, it can hinder economic growth (HBS Working Knowledge).

Countries like Canada and some Scandinavian nations are often cited as examples where inequality is managed effectively. These countries combine high levels of social services, such as free healthcare and robust social safety nets, with dynamic economies, suggesting that it is possible to achieve economic efficiency alongside social equity (HBS Working Knowledge).

Citing the Scandinavian countries and Canada as examples and bearing in mind that these countries have a vastly different culture, ethnic make-up, policies on inequality & taxes, history and levels of economic development, data suggests that

Singapore’s income inequality is lower than these benchmark countries
Singapore’s Wealth inequality is comparable to them

While there is no universally agreed-upon "optimal" level of inequality, the focus is often on finding a balance that fosters both economic dynamism and social equity. Data suggests that Singapore’s levels of income and wealth inequality is not excessive, even without estate or capital gains tax policies. And Singapore’s ongoing policy shifts are actively looking to address the symptoms of inequality but also the structural elements that give rise to it. In short, there currently no cause for concern…yet. Click the data visualizations to access the interactive Dashboards; and let us know what you think about the topic in the comments.