Goodbye Israeli public pensions, hello U.S. private retirements savings?

Published: JUNE 28, 2018 19:39

Updated: JULY 1, 2018 15:05

Senior Israelis chat and warm up before a running session as they take part in games for people over 65 years old. (photo credit: BAZ RATNER/REUTERS) — Senior Israelis chat and warm up before a running session as they take part in games for people over 65 years old.

(photo credit: BAZ RATNER/REUTERS)

The crux of the problem is that longer life expectancies and much lower birthrates are putting a toll on pension systems throughout the aging Western world.

Almost every developed country offers a public old-age pension. Except for the United States.

And Israel is increasingly emulating the privatized US model – with so many workers’ pension savings being tied up in the stock market, according to a critical study from the Shoresh Institution for Socioeconomic Research.

“Israel’s pension system is largely privatized, exposed to financial market volatility, and comprises a relatively small universal pillar,” the report says, “characteristics that underscore the government’s limited involvement” in ensuring robust pensions when compared to other developed countries.

High management fees are taking a hefty chunk out of pensions and government subsidies for private-sector pensions discriminating against the poor, argue the study’s authors, Prof. Ayal Kimhi and researcher Sarit Menahem-Carmi.

“Almost everything is privatized and subject to the risk in the stock market,” . Kimhi told The Jerusalem Post. “It’s good for the young people. They can get high returns on their portfolio.

It’s not so good for low-income people” who government-protected allowances would help the most.

The study also finds that women are considerably less protected than men in the current system.

“The benefits embedded in Israel’s pension system are not being fully utilized to prevent poverty among the country’s elderly,” the report states.

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The crux of the problem is that longer life expectancies and much lower birthrates are putting a toll on pension systems throughout the aging Western world. (Israeli men enjoy the fifth highest life expectancy in the world.) Many other developed countries have responded by linking pensions to increasing life expectancies and changing work lifestyles – namely, a decline in manual labor.

Yet Israel has yet to sufficiently act, the two academics argue.

Locally, the retirement age for women has remained low, at age 62 despite their relatively long-life expectancies. (Men can retire at age 67.) To guarantee that women will collect more in monthly pension allowances, the retirement age could be raised.

“Raising the retirement age would give women more working years for the accumulation of pension contributions and returns on savings” leading to a greater monthly stipend.

Yet in 2017, legislation to equalize women’s retirement age with men was shelved.

Some opponents of the move say that many women already retire before the official retirement age.

To help lower-income workers, the two academics propose that the value of the National Insurance Institute’s old-age allowances be adjusted for inflation.

To pay for the increased benefits, they propose that the government rescind tax deductions on pension contributions for benefit high-income earners.

“Tax incentives on retirement savings contributions are regressive, as they do not pertain to workers who fall below the tax threshold,” the study finds.

Before 2008, private pension contributions in Israel were voluntary. Now it’s mandatory – although some low-wage workplaces violate the law and don’t contribute to their workers’ pensions. That has made tax incentives redundant.

Israeli basic National Insurance pensions are worth around a fifth of the average salary – with the average person earning NIS 10,200 ($2,790) monthly.

To put that into context, a family of two is considered to be poor in Israel if its income falls below NIS 5,216 ($1,430) per month.

Gross pension benefits for Israeli men come out to be around 60% of average income – putting Israel in the middle among developed nations rankings.

Major changes to the pension system include one that occurred in 2003 – at the height of the Second Intifada and when the finance ministry was under the control of Netanyahu – when the old age allowance was unlinked from the average salary and linked to the consumer price index.

That slowed down the regular increase, leading to a rise in the poverty rate.