Israel Considers Cutting Pension Contributions to Ease Cost of Living

The Israeli government is reportedly considering a significant reform that would reduce mandatory pension contributions, particularly for younger workers, as a measure to combat the rising cost of living. The National Economic Council has published research advocating for the cancellation of pension deposit requirements for employees under the age of 40. The concern is that this move could undermine the long-term growth of retirement savings due to the loss of compound interest, potentially weakening the pension system that Israel has worked to establish over many years, especially amid challenges with the National Insurance and its payouts.

Under the proposed plan, younger workers could see a monthly reduction of approximately 500 shekels in their contributions, ostensibly to help with immediate financial pressures. However, this could lead to a projected drop of at least 2,000 shekels per month in their retirement pensions. The National Economic Council argues that the current financial situation of the elderly in Israel is relatively good, with their income at 105% of the average income, the highest in the OECD where the average is 88%. The average monthly pension, including veteran's benefits, is stated to be 16,600 shekels, though it falls to 6,300 shekels for the lowest income quintile.

The council's research suggests that the expected pension at retirement age could exceed an individual's salary during most of their working years, particularly up to age 40, a period often marked by significant financial challenges like buying a home and raising children. Therefore, they recommend eliminating mandatory contributions until age 40. The projected impact is a decrease in the average net monthly pension, including veteran's benefits, from 16,600 shekels to 14,800 shekels. While the reduction in monthly pension payments might be less pronounced for lower-income individuals because veteran's benefits constitute a larger portion of their total income, their income is still expected to drop by 600 shekels to 6,000 shekels per month.

While the proposed pension reform aims to address the cost of living, critics argue that genuine solutions require more difficult and politically challenging steps. The potential popularity of cutting pension contributions to increase immediate income might stem from a cognitive bias favoring present gains over future ones, especially before elections. The comparison of Israel's high savings rate to the OECD average is also questioned, as it allegedly overlooks crucial factors like the cost of living, benefit levels, minimum wage, and social services that impact the elderly. The Treasury has long believed that high savings rates hinder consumption, which is more beneficial to state coffers due to taxation, while pension savings represent the largest tax benefit, estimated at 40 billion shekels annually. The reliance on consumption for state revenue is seen by some as a superficial fix for the deeper issue of the cost of living that has plagued Israeli households.