Israel's National Insurance faces an empty purse by 2036

National Insurance Institute offices in Beersheva  credit: Tali Bogdanovsky
National Insurance Institute offices in Beersheva credit: Tali Bogdanovsky

Prof. Avia Spivak: Raise taxes and the retirement age, and there will be no problem.

"In 2036, the fund will be empty, and without further financing or a return of the money taken to the state treasury, the National Insurance Institute will not be capable of fulfilling its full commitments," the latest actuarial report of the Israel’s National Insurance Institute (NII) states, bringing forward the date that the NII will be insolvent by eight years from 2044 in the previous report.

NII collects insurance payments from employees’ salaries and from the income of the self-employed as a kind of income tax, and pays it out in welfare allowances. About half the payouts are old-age allowances and for nursing care for the elderly, while the other half consists of disability allowances, work injury allowances, child allowances, and unemployment benefits. According to the latest report, until 2023 the NII had more income that outgoings, and so it accumulated a fund of NIS 245 billion, or just over two years’ worth of welfare payments. But since 2023, the ratio has reversed: the NII now pays out more than it receives. To finance the level of expenditure that NII is committed to by law, it will start to take bites out of the fund, until it is finished.

Fixed-income investments

Why is this happening? According to Dr. Alex Kaplun of The College of Management Academic Studies, an expert in longevity finance and a researcher at the Aaron Institute for Economic Policy at Reichman University, the answer begins with demography. "The 75-and-over age group is growing, as is the proportion of haredim (ultra-Orthodox Jews) in the population. Their participation of haredim in the workforce is low, and they earn salaries that are too low to pay substantial NII contributions. To my mind, the age of exemption from military service should be lowered to 21, so that they can enter the workforce as early as possible. As long as the current situation continues, we have a problem."

Another reason is the way in which the money is invested. "A pension fund invests in the capital market, and can earn double-digit returns, but the NII buys Israel government bonds at low yields. Technically, the state could even decide not to repay the money."

The relationship between the NII fund and the Ministry of Finance was set out in an agreement in 1980, under which the NII invests its fund in government bonds. This, however, is a somewhat strange way of looking at the debt, as described by Prof. Avia Spivak, emeritus professor of economics at Ben Gurion University of the Negev, in a study for PIF (The Center for Pension, Insurance and Financial Literacy): "In the state budget, section 081 appears under the innocent looking heading ‘Loan from the National Insurance Institute.’ In general, when the state borrows by issuing bonds, the loan is not part of its revenues, but a way of financing the deficit. But the state treats the NII as a source of taxation, not a source of credit." Spivak adds that the liability to the NII is not reported as part of government debt. In other words, the Ministry of Finance sees the NII’s income as part of state revenues, even though this is revenue that it supposedly intends to pay back.

"As long as the NII is in surplus, the Ministry of Finance is happy," Prof. Spivak told "Globes", "but it needs to be separated from the regular public purse, and given the power to invest the money as it sees fit. Now is a good time, because additional surpluses are not accumulating. If we turn the debt to the NII into a true debt, that will dramatically increase Israel’s national debt. There is confusion here, and a transfer of money from one pocket to another that needs to be regularized."

Huge expenditure

Since 2008, Israel has not sufficed with the NII alone to ensure dignified retirement. Compulsory pensions savings were introduced, which are materially different. Instead of payment into a general fund that finances predetermined allowances, a pension fund facilitates personal accumulation of money that is invested in the capital market and can yield substantial returns over time. "The employment pension system in Israel works well, and allows accumulation of savings for retirement and insurance against loss of earning capacity at low prices," says Dr. Sarit Menahem-Carmi of the Center for Pension, Insurance and Economic Psychology and the Aaron Institute for Economic Policy. The pension funds currently hold some NIS 2.25 trillion, which not only serves as a savings scheme but is also invested directly in the economy.

"Nevertheless," Menahem-Carmi says, "there are factors that can make it difficult to reach a reasonable pension. A lack of employment continuity, withdrawal of severance and pension savings, and employers who do not deduct pension contributions as required by law. At low wage levels that can be done by agreement with employees who do not wish to reduce their income in the present. Such factors are more generally characteristic of the lowest deciles."

That leaves the universal layer provided by the NII as a safety net for low income earners. But that is the highest expense of the NII, precisely because it is universal. Rich and poor receive almost the same old-age allowance.

The goal: To work more

Ostensibly, the safety net could be left in place for the poor only, which would also enable higher allowances to be paid. For higher income earners, pension contributions could be increased at the expense of NII contributions, which, thanks to the returns on the capital market, would in the long term result in higher retirement pensions. In Dr. Kaplun’s view, however, "It’s fair that Yitzhak Tshuva should receive an old-age allowance. Otherwise, it becomes necessary to answer the question ‘who’s wealthy?’, and that’s a slippery slope. But it would be possible, for example, to provide a supplement up to the minimum wage for anyone for whom their pension and the old-age allowance are insufficient."

So what should be done? According to Prof. Spivak, the problem is not as bad as it’s made out to be. "Chiefly, it’s necessary to raises taxes and the retirement age, and then there will be no problem." For Dr. Kaplun, "The term ‘retirement’ should be expunged from the lexicon. People should stop working when they feel like it. A goal of the State of Israel is to encourage people to work for as many years as possible, so that they will pay taxes and earn a living. In practice, in the public sector, people are currently laid off automatically when they reach the retirement age."

Published by Globes, Israel business news - - on May 19, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

National Insurance Institute offices in Beersheva  credit: Tali Bogdanovsky
National Insurance Institute offices in Beersheva credit: Tali Bogdanovsky
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