Is Israel’s National Insurance Fund Too Generous? It Depends on the Benchmark

Debate over the National Insurance Institute’s financial crisis has centered on a practical question, not an academic one, whether Israel’s social security system is too generous. The article examines whether it is normal for a national insurance system to spend far more than it collects, and says the answer depends on which welfare model is used for comparison.

Prof. Johnny Gal, chief researcher and head of welfare policy at the Taub Center, and a faculty member at the Hebrew University’s School of Social Work and Social Welfare, says welfare states are usually grouped into two models. The Beveridge model, named after William Beveridge and rooted in the British wartime report that shaped postwar welfare states, emphasizes universality, everyone pays and everyone receives under defined conditions. It exists in Britain, Scandinavia, and Israel. The Bismarck model, named after Otto von Bismarck, Germany’s first chancellor and often called the father of social insurance, relies more on nonstate mechanisms such as unions, funds, and the third sector, creating stronger differences between groups. Germany, Austria, Switzerland, and partly France are cited as examples.

Gal says both systems are financed by workers, employers, and the state, but the mix and administration differ. In Bismarck-style systems, money usually goes to nonstate bodies, and people outside the labor market or outside workplace insurance often receive much less generous state support based on need. He adds that even within the same model there are major differences, for example Scandinavia is more generous than Britain and uses means tests less often.

Turning to Israel, Gal says the National Insurance Institute was founded in 1953 on the British model, as a public pool meant to fund social security only. In practice, he says, surplus money was often transferred to the Treasury and used for national projects. He recounts a well-known story in which former finance minister Pinhas Sapir told the institute’s director general, after being asked to return the money to raise benefits, to go dismantle Ashdod port and then he could have it back. Gal says this arrangement still left the institute as a separate body with some autonomy, unlike what the Finance Ministry would prefer if all taxes were collected together. He also notes that in Israel and Britain health care and social security are fully separate, while in Bismarck systems they are linked, and that old-age benefits are much more central in most European systems than in Israel, Britain, and the United States, where occupational pensions matter more.