Israeli Economic Council Proposes Pension Reform, Shifting Burden to Younger Workers

The National Economic Council, an advisory body to the Prime Minister, has proposed a significant reform to Israel's mandatory pension system. The central recommendation is to eliminate the employee's obligation to contribute to their pension until the age of 40, while maintaining the employer's full contribution. Under this proposal, employees would remain insured, and no deductions would be made from their salaries until they reach 40. After this age, full contributions would resume as currently mandated. The reform would be the default option, but employees would retain the right to opt-in to contributions before 40 if they choose.

The proposal is based on research conducted by Professor Avi Simhon and Avraham Zupnik of the National Economic Council. Their study analyzed income development throughout an individual's working life, from early employment to retirement. The research utilized data from the Central Bureau of Statistics and actuarial simulations to project pension savings and expected payouts, segmented by gender and income quintile.

The current mandatory pension law, enacted in 2008, requires both employers and employees to contribute to pension funds at a uniform rate, regardless of an employee's life stage. The new research suggests that expected retirement benefits often exceed an individual's net monthly income during most of their working years. Furthermore, most workers are projected to reach retirement with a pension income similar to, or even higher than, their pre-retirement salary, a trend particularly pronounced in lower income quintiles where the state's old-age pension plays a larger role.

Researchers argue that the current model creates a structural imbalance. Significant expenses related to family formation, child-rearing, and mortgage payments occur in the early working years when income is typically lower. While the existing system provides high security in retirement, it does so at the cost of reduced well-being for workers during their peak spending years. The council estimates that removing employee contributions until age 40 would improve living standards in early working life while maintaining adequate replacement rates upon retirement.

However, Amit Ben-Tzur, CEO of the Arlozorov Forum, criticized the proposal. He argued that instead of supporting young families and lower-income households through investments in education, housing, and public services, the plan suggests they fund the high cost of living by drawing from their own pensions. Ben-Tzur calculated that the proposal would reduce the average net retirement pension by approximately 11%, including the old-age pension, and that the guarantee of sufficient retirement income relies on projections assuming workers continue until age 70. He also warned that reducing contributions at a younger age, when savings have the most time to accrue returns, could exacerbate inequality, as those who can afford it will continue saving while those struggling financially may forgo savings, facing hardship in old age. Ben-Tzur emphasized that mandatory pensions are a crucial social achievement and that this proposal shifts risk from the state to the worker.