Israeli Economy Warned of Chilean Pension Crisis Risk
A senior figure in the capital market has warned that adopting a proposal by Professor Avi Simhon, chairman of the National Economic Council, could lead to a pension crisis similar to Chile's. Simhon's proposal suggests suspending mandatory employee pension contributions of 6% of salary until age 40, while maintaining employer and severance contributions. The council estimates this would increase young workers' disposable income by approximately $130 per month during years when they are establishing families, raising children, and paying mortgages.
This proposal stems from research by the Bank of Israel, which previously found that mandatory pension savings could negatively impact consumption smoothing for low-income earners. The research indicated that the state reduces their income during periods of low earnings to provide a very high replacement rate in the future. Some low-income workers have also actively sought to avoid contributions when they were not financially beneficial.
The core debate is not whether to adjust mandatory pension parameters, but how to do so without setting a dangerous precedent. The Chilean experience is a major concern for economic officials. Chile's defined contribution pension model, with its personal accounts and long-term savings invested in capital markets, made pension funds a central institutional investor. However, the model had issues, including low contribution rates and many workers facing periods without deposits, resulting in lower-than-expected pensions and exclusion of those in informal employment.
The situation in Chile changed dramatically with the COVID-19 pandemic. In early 2020, the Chilean Congress allowed citizens to withdraw portions of their pension savings to cope with income loss. Initially presented as an exceptional measure, this was followed by further withdrawals in 2021. In total, over $48 billion was withdrawn, representing about 20% of Chile's GDP and a quarter of its pension fund assets in 2020. The Chilean regulator estimated that approximately 3.8 million people were left with no pension savings at all, about a third of all savers.
The International Monetary Fund calculated that after the first two withdrawal rounds, about 95% of those with positive pension savings had withdrawn funds at least once, with 57% utilizing all three rounds. This indicated the withdrawals became a near-systemic norm rather than a measure used only by a few in distress. While the system did not 'collapse,' the withdrawals significantly impacted the depth and liquidity of the local capital market, reduced the institutional investor base, and decreased future pension funding by an average of 21% before government support.
Chilean officials caution that the pandemic withdrawals did not create the pension problem but rather accelerated and exacerbated it. A major reform in 2025 is gradually increasing employer contributions to address future savings and social security components. The relevant lesson for Israel is that while Simhon's proposal differs from the Chilean withdrawals by not allowing access to already accumulated funds, regulators fear the institutional risk. The Chilean lesson is not that pension funds are untouchable, but that when long-term savings become a tool to solve present income problems, the political temptation to use them grows rapidly. This could lead to a slippery slope, potentially affecting those struggling with mortgages, economic downturns, or war-related losses, ultimately undermining the fundamental principle of separating present and future funds.
