Pension Reform Proposal Could Let Israelis Opt Out of Contributions Until Age 40

A new proposal in Israel suggests allowing employees to stop contributing to their pension funds until the age of 40. The idea, put forth by Professor Avi Simhon, economic advisor to Prime Minister Benjamin Netanyahu, and Avraham Zupnik, argues that mandatory contributions are burdensome during years when incomes are lower and family and housing expenses are high. Under the current system, employees contribute 18.5% of their insured salary to pensions, with 6% from the employee, 6.5% from the employer, and an additional 6% for severance pay. The proposal would maintain the employer's contribution but make the employee's portion optional until age 40, with the option to continue contributing voluntarily. This change could provide employees with an immediate net income increase of approximately 500 shekels per month.

The rationale behind the proposal stems from the significant gap between early-career incomes and the substantial expenses faced by many Israelis between ages 25 and 40, including home purchases, mortgages, and child-rearing. Research supporting the proposal indicates that current pension calculations result in a future retirement payout that is relatively high compared to the income earned during much of an individual's working life.

However, the proposal also has a projected cost: a reduction in future pension payouts. The average net monthly pension is estimated to decrease from 16,600 shekels to 14,800 shekels, and the average replacement ratio (pension income relative to pre-retirement net income) would fall from 1.09 to 0.97. For the three lowest income quintiles, the replacement ratio is still projected to remain at or above 1, meaning their retirement income would be similar to or higher than their pre-retirement net income.

The proposal aims to redistribute pension savings throughout a person's life, allowing for more disposable income during years of high expenses and lower earnings, while relying on continued employer contributions and voluntary employee savings. The researchers emphasize that these projections are based on assumptions about future salaries, investment returns, and retirement ages, and actual outcomes may vary.