BoI warns on National Insurance Institute bankruptcy

National Insurance Institute

The Bank of Israel says that if the government does not inject money before 2050, then old age allowances will have to be cut by 40%.

Israel's National Insurance Institute will be bankrupt in 2050 and will require a government bailout but it would be better if it intervened sooner, an analysis carried out by Adi Finkelstein of the Bank of Israel’s Research Department has found. This forecast is markedly later than those presented in previous discussions held in the public sector with some suggesting that the National insurance Institute could be bankrupt by 2037.

This latest analysis is based on a model integrating the demographic forecasts of the Central Bureau of Statistics, a long-term growth model developed at the Bank of Israel, and statistical analyses of the development paths of various allowances and of National Insurance Institute contributions based on past trends.

The Bank of Israel found that annual expenditure on National Insurance allowances is expected to increase gradually in the coming four decades, to as much as an additional 0.8% of GDP. In a more plausible scenario, in which past trends in allowances’ growth continue, old-age and child allowances, as well as the ceiling for income subject to National Insurance contributions, are indexed to the average wage in the economy rather than to the CPI, and which assumes a moderate rise in the retirement age - an identical increase is expected.

The Bank of Israel concluded, "Despite the long time until the point in which cash flow gaps are expected in National Insurance Institute financing, there is considerable benefit in enacting the adjustments required to balance the system at an earlier time. If the government only makes the necessary adjustments in 2050, an immediate adjustment of 0.8% of GDP will be required, meaning, for example, a reduction of 40% in old-age and survivors’ allowances. In contrast, beginning the adjustments in 2021 can reduce the size of the annual adjustment to 0.4% of GDP, meaning a reduction of only 10% in benefit payments. Similarly, an adjustment through increasing the National Insurance Institute contributions can be more moderate, as it will be spread over more citizens and a longer period.

Published by Globes, Israel business news - en.globes.co.il - on September 15, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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