Israel Considers Halving Pension Contributions for Workers Under 40

Israel's National Economic Council is proposing a significant shift in pension policy, suggesting that employees under the age of 40 be exempt from mandatory personal pension contributions. The aim is to increase their net monthly income, with an estimated average boost of around 500 shekels per month, to help young households manage expenses like housing, childcare, and loan repayments. Employer contributions would continue, and employees could opt-in to continue their own contributions if they choose.

This proposal, outlined in a policy paper by Council head Prof. Avi Simchon and Avraham Zupnik, is based on research by Zupnik, Prof. Rami Yosef, and Dr. Shanev Malul. It seeks to reallocate income across a person's lifespan, providing more funds during younger, higher-expense years at the cost of a potentially lower pension payout in retirement. The idea stems from discussions about whether some Israelis are over-saving for retirement, given compounding returns and lower management fees over long careers.

Under the current system, employees contribute 6% of their insured salary, with employers adding 6.5% for severance and 6% for other pension components, totaling 12.5% from the employer. The proposal would eliminate the employee's 6% contribution until age 40, while the employer's 12.5% would still go into the pension fund. Full employee contributions would resume at age 40. This means younger workers would still accumulate retirement savings, but the default would be lower contributions, requiring an active choice to maintain the current rate.

Research accompanying the proposal projects that the average gross monthly pension could decrease from approximately 17,000 shekels to 14,900 shekels, a difference of about 2,100 shekels per month. This would lower the projected retirement income from about 109% of pre-retirement net salary to roughly 97%. However, these are model-based forecasts, and the actual outcome depends on individual circumstances, including career length and potential early retirement. The long-term impact of compounding returns on early contributions is a significant factor that needs careful consideration.

The proposal also acknowledges the immediate financial benefits of increased disposable income, which could stimulate consumption and support businesses. However, it cautions that not all of the extra money would boost economic growth, as some would be saved or spent on imports, potentially increasing prices in certain sectors. A key element is the default setting: without active intervention, employees would receive more take-home pay but save less for retirement. The paper stresses the need for clear information to be provided to employees about the trade-offs involved, especially concerning potential impacts on retirement income if they retire earlier than age 70 or withdraw funds prematurely.