Proposal to Cancel Pension Contributions for Young Israelis Could Cost Billions

A proposal by Professor Avi Simhon, Chairman of the National Economic Council, to cancel mandatory pension contributions for workers under 40 could result in the loss of up to 68 billion shekels in investment gains accumulated over the past decade. This figure, derived from an analysis by the Israeli financial newspaper Calcalist, highlights the potential long-term economic impact on young savers.

The analysis examined pension fund data for individuals aged 50 and under, a common allocation for younger savers. While the proposal specifically targets those under 40, Calcalist extrapolated data from the largest pension fund, Menora Mivtachim, to estimate that approximately 60% of assets in the 50-and-under track belong to individuals under 40. This led to an estimate that about 181.5 billion shekels of the 302.5 billion shekels managed in these tracks belong to those under 40.

Over the last decade, these funds generated a weighted average return of approximately 140%, significantly outpacing inflation. Calcalist's calculation, which accounts for gradual monthly deposits rather than applying the total return to the current balance, estimates that roughly 68 billion shekels of the 181.5 billion shekels attributed to those under 40 represent investment profits, not principal contributions. A similar analysis for the past five years showed that approximately 38.5 billion shekels out of an estimated 181.5 billion shekels were investment gains.

The current mandatory pension contribution in Israel is 18.5% of the relevant salary, with the employee contributing 6% and the employer 12.5%. Simhon's initiative aims to allow employees under 40 to opt out of their 6% contribution, thereby increasing their disposable income by an estimated 500 shekels per month. This could provide immediate relief for young workers facing high living costs, potentially freeing up significant funds for mortgages or family expenses.

However, foregoing these contributions means losing out on the power of compound interest, where early savings have the longest period to grow. The proposal could also lead to billions in savings for the state, as individuals would lose tax credits on their non-contributed portions. While the stated goal is to boost young people's immediate income, the long-term consequence could be a substantial reduction in their future retirement funds.