Proposal to Ease Mandatory Pension Savings for Young Israelis
A new proposal suggests exempting Israeli workers under the age of 40 from mandatory pension contributions, aiming to alleviate financial pressure on younger generations facing high living costs. The idea, put forth by Professor Avi Simhon, head of the National Economic Council, is based on an academic paper and suggests that employees could voluntarily continue saving while employer contributions would remain unchanged. The rationale is that young adults struggle with expenses like rent, mortgages, and childcare, making the mandatory 6% salary deduction particularly burdensome during these formative years.
However, the proposal carries a significant long-term economic cost. Experts argue that the years before age 40 are crucial for pension savings due to the power of compound interest. Money saved early has decades to grow; for instance, a 600 shekel monthly contribution from age 23 to 40, assuming a 4% annual return, could yield approximately 162,000 shekels by age 40. Left invested until age 67 without further contributions, this sum could grow to around 410,000 shekels, equivalent to a monthly pension of about 2,000 shekels.
Behavioral economics also plays a role. Research from the Bank of Israel indicates that mandatory pension reforms between 2006 and 2019 increased net household savings by about 0.7% of GDP, with mandatory savings alone contributing 0.35% of GDP. This suggests that forced savings not only shift funds between accounts but also increase overall savings, particularly among younger, lower-income individuals who are less likely to save the money elsewhere if not mandated.
Since the introduction of mandatory pension savings, Israel's long-term savings landscape has transformed, with assets under management in provident funds and pension schemes growing from approximately 406 billion shekels in January 2008 to about 2.3 trillion shekels by July 2026. While this growth is attributed to contributions, returns, salary increases, and labor market expansion, it highlights the effectiveness of the long-term savings mechanism. The article concludes that while supporting young families is essential, weakening their retirement savings is not the optimal solution. Alternative measures like tax breaks, housing assistance, and combating the cost of living are suggested instead, emphasizing that the proposal shifts funds from age 67 to age 30, providing immediate relief at the expense of future financial security.
