Living in Dignity
Israelis fear not being able to live in dignity once they reach old age.
Our Democracy Index shows that while Israel’s citizens love their country and are optimistic about its future, they feel a lack of confidence about their personal futures. In-depth treatment of pensions is a significant economic issue that will enable a reasonable distribution of expenditures and lighten the state’s burden regarding its future spending on its citizens. But equally important is the significant democratic necessity to rectify a situation that is dividing our already torn society into rich and poor. Failure to address this problem could damage the resilience and solidarity of Israeli society.
While the latest Poverty and Social Gaps Report published by the National Insurance Institute shows improvement in the situation of elderly people here, their poverty rate – 16.7% – is still relatively high when compared with the OECD countries.
The Israel Democracy Index, published last week, demonstrates that 56% of the public fear not being able to live in dignity once they reach old age. Among those with low income this fear is greater still, at 65%. In addition, more than half of the public believe that they cannot depend on the state to help in their time of need.
One way to address this problem was proposed in a program titled “Growing Old with Dignity” presented in a conference held by the Manufacturers Association of Israel. The program proposes increasing senior citizens’ allotments differentially for low income people, through equal funding from the state and from employers, in order to reach an income level known as “the dignified living threshold.” But that is not enough. We must also improve the quality of pension savings and to increase pensions, while taking other parameters, such as age and income, into account. (Full disclosure: one of the authors, Eytan Sheshinski, is the head of the Growing Old with Dignity Committee.) The World Health Organization and the UN have defined population aging as one of humanity’s greatest victories – and one of its greatest challenges. The increase in life expectancy in the developed countries, Israel among them, has led to the aging of the population; according to a forecast by the Central Bureau of Statistics, the proportion of those aged 65 and over is expected to increase from 11.1% of the population in 2015 to 15.3% in 2065.
These changes, along with labor market trends, such as late entry into employment, could lead to a decline in pension savings and a significant reduction in post-retirement income.
Pensions are composed of three components: National Insurance Institute allotments, which are uniform; pension and employment funds; and long-term savings by individuals. The fact that the NII allotments are fairly low makes pensions from employment all the more important, while long-term savings depend exclusively on the individuals.
While the pension system has undergone many changes in recent decades in order to stabilize and maintain its ability to repay debts, one disturbing consequence of these changes has been the creation of a system that perpetuates inequality and fails to address the high poverty rates among those of working age, thus leading to growing inequality after retirement.
Studies have shown that life expectancy is greater among high income people. Correspondingly, high income people enjoy their pensions as well as the subsidy given them by the state via the allocation of designated bonds in their pension portfolios, for a longer time. These bonds, which the state issues only for pension funds, promise an annual yield of 4.86% and are also linked to the consumer price index. Thus, the state protects the portion of the funds that are in pension savings, while the rest of the portfolio is invested in the stock market, with all its inherent risks.
To reduce the disparities that result from the structure of the pension system and to strengthen the system, long-term, comprehensive measures are necessary along with learning from the experience of countries that have proved their success in this area. Among other things, changes must be made in the allocation of state subsidies, and in the system of designated bonds and their method of distribution.
In addition, a dynamic model for determining retirement age should be developed. The current model, in which the low risk asset in the pension portfolio is allocated according to the person’s age in order to minimize the risk to older people, is not enough. Other parameters, such as income level, should be taken into consideration, so that poorer populations receive higher annuity payments and post-retirement inequality is reduced. The risk to the pension fund of a person who earns a monthly salary of NIS 40,000 cannot be compared with the risk to the fund of the person who earns the minimum wage.
First published in the Jerusalem Post