Israeli Finance Ministry Considers Cutting Pension Contributions to Boost Net Salaries

The Israeli Finance Ministry has formed a team to review pension tax benefits and is considering recommending a reduction in mandatory pension contributions. This move aims to increase workers' net salaries in the short term but risks undermining long-term retirement savings and the financial security of Israel's growing elderly population.

The proposal comes ahead of a planned 2028 increase in the tax exemption rate on pension payouts from the current 57.5% to 67%. The Finance Ministry is also preparing the upcoming state budget's Arrangements Law, seeking reforms to close the fiscal deficit caused by the recent war. Reducing pension contributions would save the state billions in tax benefits and increase tax revenues from private consumption.

Pension reforms over the past three decades have gradually raised contribution rates, currently at 12.5% of wages (6% employee, 6.5% employer). These reforms have significantly boosted household savings, contributing about 0.7% of GDP growth between 2006 and 2019. However, the state currently foregoes nearly 31 billion shekels annually in pension-related tax benefits, the largest tax expenditure by far.

Critics warn that cutting contributions could be disastrous for future retirees, especially amid rising life expectancy and economic uncertainty. Dr. Alex Kaplan from the College of Management cautions that reducing pension savings now would be difficult to reverse and could jeopardize retirement funding for decades. The pension system combines National Insurance payments, mandatory pension contributions, and private savings, but old-age benefits have been eroded since 2004 due to linkage changes.

The Finance Ministry also plans to limit tax exemptions on private savings withdrawals, capping capital gains tax exemptions at 200,000 shekels. With Israel's elderly population expected to rise from 13% to 15% over 25 years and life expectancy increasing by 16% in 50 years, concerns grow over the sustainability of pension and social security systems. The State Comptroller recently reported government failures in strategic planning for aging population needs, including shortages of geriatric doctors and threats to National Insurance stability.

The debate highlights tensions between immediate economic relief for workers and the long-term fiscal and social challenges posed by demographic shifts and pension sustainability.