Pension Reform Proposal Criticized for Ignoring Elder Care Costs

A new position paper warns that a proposal to reduce mandatory pension savings for young workers could jeopardize their future financial security, particularly by overlooking the growing crisis in long-term care and the substantial costs individuals may face later in life. The paper, authored by Michal Gur Kagan, head of pension and savings at the Phoenix Institute for Capital Market Research at Reichman University, and Dr. Shoshana Tzadok-Rosenblut, criticizes an initiative by the National Economic Council, chaired by Professor Avishai Simhon, to eliminate mandatory pension contributions for employees under 40. Gur Kagan argued that it is illogical to discuss shifting from insurance to savings to fund elder care while simultaneously claiming pensions are excessive. The proposal, developed by Simhon and economist Avraham Zupnik, suggests canceling the employee's 6% pension contribution until age 40, while employer contributions of 12.5% would continue, and employees could opt-in. This change is expected to increase young workers' disposable income by about 500 shekels monthly, aiding them with high housing and child-rearing expenses. However, the authors contend that the proposal fails to account for the full spectrum of financial needs in old age, including elder care. The Israeli long-term care insurance sector is currently facing a crisis and uncertainty regarding coverage from health funds and potential public assistance from the National Insurance Institute. The position paper highlights that a pension that seems adequate relative to pre-retirement salary might not ensure a dignified standard of living, especially considering potential long-term care needs. The researchers also question the council's methodology, which uses a retirement age of 65 for calculating replacement ratios, even though the model assumes retirement at 70. They argue that a high replacement ratio does not necessarily guarantee financial well-being, citing that lower-income individuals might receive a pension that, while high relative to their low salary, is insufficient to cover future expenses, particularly care costs. The authors also challenge the assumption that household expenses are highest in early working years, pointing to the 'sandwich generation', those aged 40-60 who support both their children and aging parents, potentially including funding care for the latter. The paper emphasizes the significant impact of compound interest, making early savings far more valuable than later contributions. The researchers propose alternative policies to boost young families' disposable income, such as expanding tax credits, subsidizing early childhood education, adjusting benefits for low-income elderly, increasing tax benefits for low-income pension savers, and implementing a tiered contribution model that gradually increases over a career.