Pension Policy

Introduction

The Annual Economic Conference’s Pension Team discussed a number of central issues that were presented to the plenum. The first subject was concerned with a mandatory pension law. The team did not reach a consensus on this issue. However, there was broad agreement opposing a government pension law. Likewise, the team agreed that should the Knesset enact a mandatory pension law, it should be implemented gradually.

Investing pension fund monies in the capital market was the second issue discussed at length at the conference. The speakers’ remarks revolved mainly around the method of implementing the move with regard to issues such as the safety net that the pension funds would receive, pension funds as a means of raising additional funds for both real investments in Israel and venture capital funds, etc. Some argued that currently it is not possible to transfer the funds’ monies to the capital market, in light of government guarantees of returns on the funds through earmarked bonds.

I. Mandatory Pension Law–Yes or No?

Israel’s institutionalized pension insurance includes two layers. The first, National Insurance, provides minimal pension insurance to every citizen in the State of Israel. The second, the pension and life insurance system, invests employer and employee premiums in interest-bearing assets, and the principal and interest are supposed to suffice for making the pension payments.

The central issue discussed by the Pension Team addressed making the pension’s second layer, occupational pension, mandatory. The country’s first pension layer, National Insurance, was also discussed. While there was near consensus among the participants against making the second pension layer state-sponsored and universal by enacting a state pension law, there were those who argued that the first pension layer is insufficient to enable a minimum standard of living for all of the country’s citizens, particularly for those not insured by the second pension layer. A proposal was made to re-examine the distribution of revenues made through the first pension layer and even to scrap the universal nature of the aforesaid pension’s distribution.

Opponents of a mandatory pension law raised the following arguments:

1. A mandatory pension law means an additional tax on individuals. Since the tax burden in Israel is already high, additional taxes that burden the public should not be levied.
2. A mandatory pension law would become a state pension law even if that were not the intention of the law’s drafters. This law would produce a new cake to be divided among the citizens. The “principal of universality” would be applied to the cake, and the occupational pension would serve as another tool for distributing revenues in the economy.

Supporters of the law raised the following arguments:

1. Due to the problems of a moral hazard, individuals do not save enough for their old age. Over time, there is a lack of consistency in individuals’ preferences regarding long-term savings that is liable to lead to a savings shortfall during the first part of individuals’ lives. Therefore, in order to ensure that individuals not become a burden on society, a mandatory pension law should be enacted that provides for governmental assumption of responsibility for individuals’ long-term pension savings.
2. Currently, most employees who are insured through pension insurance and who receive pension benefits (through bonds or tax breaks) are the strong and unionized workers. Enacting a mandatory pension law would apply the obligation to make pension deductions to all employers, and thus on all employees in the economy, and would contribute to reducing the inequality in receiving benefits that exists between strong and vulnerable workers.
3. The data show that most of the individuals who are not covered by pension insurance are from the more vulnerable socioeconomic strata. Government intervention today would prevent a burden on the social system in the future.

II. Mandatory Pension–Conditions

In the context of the deliberations, details of a mandatory pension law were discussed: up to what wage would the obligation to make contributions through the law be imposed and from what wage level would the pension insurance become voluntary; would the contributions need to be equal over the course of the insured person’s employment life, etc.

1. Mandatory age for pension contributions:two approaches were presented. The first relates to applying a mandatory pension law beginning at age 25 (or age 21), and at fixed percentages of the individual’s salary. The second relates to linking the rates of contributions to the lifetime earning cycle, e.g., lower contribution rates would be permitted in the early stages of employment and higher rates later on. There was also discussion regarding the option of spreading the tax credits given for pension savings over a number of years; in other words, providing an opportunity to accumulate the entitlement over time.
2. The pension law should also be applied to the self-employed sector, with the required changes.
3. A proposal was raised to use the severance pay fund as a basis for a pension arrangement–in other words, withholding only 8.33% instead of 17.5%. There were those who agreed that these percentages could provide a gradual entry into a mandatory pension law.
4. The working groups discussed the level of coverage that should be defined as mandatory. Two main versions were presented–coverage up to the equivalent of the average salary in the economy and coverage up to the equivalent of twice the average salary.
5. The non-Israeli worker sector needs to be dealt with when pension contributions are made obligatory in the entire economy, in order to prevent distortions in the labor market.
6. The option was discussed of providing incentives to encourage long-term savings that are transferred to the policyholder through an annuity, as opposed to receiving a lump sum payment.

III. Transferring Pension Fund Monies to the Capital Market

Currently, 70% of new pension fund monies are invested in government-issued earmarked bonds with an effective annual yield of 5.05%. Regarding the transfer of these monies to investments in the capital market, there was a consensus among the participants that making a transition to the capital market would be a positive move, but the main discussion focused on the question of whether it is possible to implement such a move, and if so, how. First, the idea was raised of transferring the entire economy (including the security forces) from defined benefit (DB) plans to defined contribution (DC) plans. Then the conditions allowing for such a move to be successfully implemented were brought up. Among other things, these conditions include the following: transparency, the ability to move between funds (including the possibility of revaluating the funds' assets at every stage) and the subsidy inherent in the earmarked bonds.

Still, there were those who argued that the funds' monies should not be transferred to the capital market until a minimum occupational pension is assured for retirees, as pensions in the United States are. There too, for the Social Security layer, which distributes occupational pensions to workers, the government issues earmarked bonds that guarantee the policyholders' monies and promise a defined yield. Only the third layer is invested in the capital market. Later on in the discussion, a proposal was raised to enact a mandatory pension law and ensure a yield on deposits up to the average wage level in the economy by issuing earmarked bonds, without ensuring a yield at all. This level would be defined as DB, while the rest of the pension monies would be deposited in DC plans.

The central question addressed in the discussion on the subject of transferring the monies to the capital market was who would bear the added risk of investments in the free market. In other words, should policyholders be provided with a safety net, such as ensuring a minimum yield, and how should the moral hazard problems of investment managers stemming from providing a guaranteed yield be resolved? Some discussion participants argued that in the current political climate it is not feasible to give policyholders an assured yield lower than the yield they currently receive, e.g., 5.05%. Others asserted that a safety net on a very low level could be provided, and that the pension funds should be transferred gradually to the capital market in this manner.

There were substantial disagreements on the safety net question. Some participants argued that providing a safety net means that the funds would not be responsible for their investments, since due to the moral hazard too many investment limitations would be placed on them. These participants asserted that a safety net should not be provided. Instead, investment managers should be given incentives to invest the pension monies responsibly in the free market, under as low a level of regulation as possible. Those who supported a safety net argued that the government provides such a net, whether directly or in the form of a state guarantee, as it guaranteed bank deposits, etc. A proposal was made to inject the safety net mechanism gradually into the pension funds, perhaps even on a voluntary basis in the first stage.

Similarly, the participants discussed the macroeconomic implications of transferring the funds' monies to the capital market. The earmarked bonds currently constitute a source for raising funds and financing the deficit. Halting the issuance of earmarked bonds means giving up these sources. At least in the medium term, there is a problem stemming from the government's previous commitments, so that overall there would be fewer sources of funds for financing the deficit. In contrast, continuing to issue earmarked bonds leads to a situation in which half of the government debt is not negotiable and as a result the negotiable bond market shrinks. If there is no deep and broad bond market, the capital market will also contract.

Another argument raised on the subject of transferring pension monies to the capital market is that these monies could constitute a source for cooperation on infrastructure projects and mortgages in the first stage, as well as a source for raising monies for the Israeli venture capital funds that currently raise money from foreign pension funds. In addition, the argument was raised that for the well-being of Israeli investors, there is a need for foreign investments in the context of the pension funds' asset portfolio.

IV. Additional Issues

1. Completing the process of moving from budgeted pensions to pensions based on the accumulation method as soon as possible.
2. Linking the retirement age to life expectancy–in this context, if the pension plans are actuarially balanced and the retirement age rises, individuals will be able to accumulate greater rights to a pension and increase the amount of the payments after they stop working. Some participants argued that raising the pension age would cause greater unemployment in the economy.
3. Equalizing pension laws for men and women.
4. A proposal was made to establish a pension and old-age commission that would act as an oversight body and make sure pension rights in the DB plans are adjusted.
5. Giving retirees ownership over the pension and requiring the possibility of moving between the various pension funds over the course of an individual's working years.
6. The high degree of centralization in the pension fund market must be dealt with.
7. Estimates of the pension funds' actuarial deficit range between NIS 300 billion and NIS 550 billion.