Israel's National Economic Council Proposes Pension Contribution Changes

Israel's National Economic Council, led by Avi Simhon, is proposing to eliminate mandatory pension contributions for employees until the age of 40. The council argues that this change would provide workers with an average monthly net income increase of approximately 500 shekels. However, this would come at the cost of reducing average monthly pension payouts after retirement by about 2,000 shekels.

The rationale behind the proposal is that the significant expenses associated with starting a family, raising children, and paying mortgages occur during the early working years when income is typically lower. The council believes it is illogical to mandate high savings rates during these peak need periods. Current findings suggest that expected retirement benefits often exceed net income during most working years, and many retirees are projected to receive pensions similar to or even higher than their pre-retirement salaries. While this structure ensures a high level of security in old age, the council contends it negatively impacts overall well-being throughout a person's life cycle.

The current mandatory pension system, implemented in 2008, requires contributions totaling about 18.5% of salary up to the average wage. This includes 6% from the employee, 6.5% from the employer, and an additional 6% from the employer designated for severance pay. The pension system comprises three tiers: the National Insurance Institute's old-age pension, private pensions, and other private savings.

Research from the council indicates that the elderly in Israel are relatively well-off, with average incomes at 105% of the national average, a figure higher than the OECD average of 88%. The average monthly pension, including the net old-age pension, is estimated at 16,600 shekels, though it drops significantly to 6,300 shekels for the lowest income quintile. The council's simulation projects that eliminating early contributions would reduce the average net monthly pension, including the old-age pension, from 16,600 shekels to 14,800 shekels.