“In 2036, the fund will be empty, and without additional financing or the return of the funds taken to the state treasury, the National Insurance Corporation will not be able to meet its full obligations,” the Israel National Insurance Corporation’s latest actuarial report states. The date on which the National Insurance Institute will be insolvent was provided for eight years from 2044 in the previous report.
National Insurance collects insurance payments from employees' salaries and from the income of the self-employed as a form of income tax, and pays them in the form of social welfare benefits. About half of the payments are old-age and nursing care allowances, while the other half consists of disability allowances, work-related injury allowances, child allowances, and unemployment benefits. According to the latest report, until 2023, the National Insurance Institute had more income than expenses, thus amassing a fund of NIS 245 billion, or just over two years of welfare payments. But since 2023, the ratio has reversed: the National Insurance Institute now pays more than it receives. To fund the level of spending to which National Insurance is committed by law, it will start taking bites from the fund until it is finished.
Fixed income investments
Why is this happening? According to Dr. Alex Kaplun of the School of Management Studies, an expert in longevity finance and researcher at the Aron Institute for Economic Policy at Reichmann University, the answer starts with demographics. “The age group of 75 and over is growing, as is the proportion of Haredim (ultra-Orthodox Jews) in the population. Haredim have low labor force participation, and they are paid too low to pay a significant amount from National Insurance.” In my opinion, the age of exemption from military service should be reduced to 21 years, so that they can enter the labor market as soon as possible. As long as the current situation continues, we have a problem.
Another reason is the way the money is invested. “The pension fund invests in the capital market and can achieve double-digit returns, but the National Insurance Institute buys Israeli government bonds at low yields. Technically, the state could even decide not to repay the money.”
The relationship between the National Insurance Fund and the Ministry of Finance was defined in a 1980 agreement, under which the National Insurance Fund would invest its fund in government bonds. However, this is a rather strange way of looking at debt, as described by Professor Avia Spivak, Emeritus Professor of Economics at Ben-Gurion University of the Negev, in a study for PIF (Center for Pensions, Insurance and Financial Culture): “In the state budget, the Department 081 under the innocent title “Loan from the National Insurance Institution.” In general, when the state borrows by issuing bonds, the loan is not part of its revenues, but rather a means of financing the deficit, but the state deals with National Insurance as a source of taxes, not as a source of credit The obligation to the National Insurance Corporation is not reported as part of the government debt. In other words, the Ministry of Finance considers the National Insurance Corporation's income to be part of state revenues, even though it is assumed that it intends to repay it.
“As long as the National Insurance Fund has a surplus, the Treasury is happy,” Professor Spivak told Globes. “But it should be separated from the regular public treasury and given the ability to invest the money as it sees fit.” Now is the time, because additional surpluses are not accumulating. If we converted the debt owed by the National Insurance Institute into real debt, this would lead to a significant increase in the Israeli national debt. “There is confusion here, and the transfer of money from one pocket to another needs to be regulated.”
Huge expenses
Since 2008, Israel has not limited itself to the National Insurance Institute alone to guarantee a dignified retirement. Mandatory pension savings have been introduced, which vary materially. Instead of paying into a general fund that finances predetermined allowances, a pension fund facilitates the personal accumulation of money that is invested in the capital market and can generate significant returns over time. “Israel’s labor pension system works well, allowing the accumulation of savings for retirement and insurance against loss of earning capacity at low rates,” says Dr. Sarit Menachem Carmi of the Center for Retirement, Insurance and Economic Psychology and the Haroun Institute. for economic policy. Pension funds currently hold about NIS 2.25 trillion, which not only acts as a savings scheme, but is also directly invested in the economy.
However, “there are factors that can make it difficult to access a reasonable pension,” says Menachem Carmi. Lack of continuity of employment, withdrawal of end-of-service benefits and retirement savings, and employers who do not deduct retirement contributions as required by law. At lower pay levels, this can be done by agreement with employees who do not wish to reduce their income at present, and these factors are generally a feature of the lower deciles.
This leaves the National Insurance Institute's universal class as a safety net for low-income people. But this is the highest cost for the National Insurance Institute, precisely because it is global. The rich and the poor get about the same old-age allowance.
Goal: work more
Ostensibly, the safety net could be left only to the poor, which would also enable higher benefits. For high earners, pension contributions can be increased at the expense of National Insurance contributions, which, thanks to capital market returns, will in the long run lead to higher pensions. But from Dr. Kaplun's point of view, “It is fair that Yitzchak Tshuva receives the old-age allowance. Otherwise, it becomes necessary to answer the question, 'Who is rich?' And this is a slippery slope. But it would be possible, because, for example, to provide a supplement of up to to the minimum wage for anyone whose pension and old-age allowance are insufficient.”
So what should be done? According to Professor Spivak, the problem is not as bad as he imagined. “Mainly, it is necessary to raise taxes and the retirement age, and then there will be no problem.” For Dr. Kaplun, “The term ‘retirement’ should be expunged from the lexicon. People should stop working when they feel like it. The goal of the State of Israel is to encourage people to work for as many years as possible, so that they will pay taxes and earn a living. Process In the public sector, people are automatically laid off when they reach retirement age.
Published by Globes, Israel Business News – en.globes.co.il – on May 19, 2024.
© Copyright Globes Publisher Itonut (1983) Ltd., 2024.
