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This article explores the distributional aspects of Israel's pension system, including pension reforms, pension incentives, retirement age, gross pension replacement rate, average monthly income, and cumulative management fees.
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SHORESH SHORESH Institution for Socioeconomic Research Institution for Socioeconomic Research info@shoresh.institute http://shoresh.institute SHORESH Institution for Socioeconomic Research Israel’s Pension System: Distributional Aspects Sarit Menahem-Carmi, Ben-Gurion University Ayal Kimhi, Shoresh Institution and Hebrew University info@shoresh.institute http://shoresh.institute
Pension reforms in Israel • 1995 – moving from DB to DC • 2003 – raising the official retirement ages by 2 years • 2003 – reducing earmarked bonds from 70% to 30% • 2008 – mandatory pensions for salaried employees • 2008 – removing the option of cashing providence funds • 2016 – age-dependent exposure to risky investments • 2017 – mandatory pensions for self-employed
Pension incentives • Tax breaks • Earmarked bonds (currently subsidized interest) • Distributional issues • Tax breaks are regressive • Management fees are regressive • The positive correlation between longevity and income is not taken into account
Expected remaining life expectancy at age 65 – Men Japan Korea Australia Switzerland Israel Italy Iceland New Zealand Chile Sweden United Kingdom Spain Canada Ireland France Austria Mexico Norway Greece Luxembourg Germany Netherlands Belgium Portugal Finland United States Denmark Slovenia Turkey Czech Republic Poland 2010-2015 Slovak Republic + 2060-2065 Hungary Estonia 12 13 14 15 16 17 18 19 20 21 22 23 24 in years, OECD countries in 2010-15 and in 2060-65 Source: Sarit Menahem Carmi and Ayal Kimhi, Shoresh Institution Data: OECD Pensions at Glance 2015
Expected remaining life expectancy at age 65 – Women Japan Korea France Spain Italy Switzerland Australia Chile Austria Finland Portugal Israel Sweden Canada Iceland Luxembourg Belgium Germany Norway New Zealand Ireland Greece Slovenia Netherlands United Kingdom Mexico United States Turkey Denmark Poland Czech Republic 2010-2015 Estonia + 2060-2065 Hungary Slovak Republic 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 in years, OECD countries in 2010-15 and in 2060-65 Source: Sarit Menahem Carmi and Ayal Kimhi, Shoresh Institution Data: OECD Pensions at Glance 2015
Retirement age Norway Iceland Israel United States Portugal Ireland Poland Netherlands Sweden Spain New Zealand Mexico Japan Germany Finland Denmark Canada Australia Switzerland United Kingdom Chile Austria Estonia Czech Republic Hungary Italy Slovak Republic Greece normal retirement age France Korea additional years for men (if different) Luxembourg Belgium Turkey 58 59 60 61 62 63 64 65 66 67 Slovenia for those retiring in 2014 in OECD countries Source: Sarit Menahem Carmi and Ayal Kimhi, Shoresh Institution Data: OECD Pensions at Glance 2015
Gross pension replacement rate Netherlands Spain Austria Luxembourg Turkey Portugal Italy Iceland Denmark Greece Slovak Republic Israel Hungary Sweden Finland France Estonia Norway Czech Republic Belgium Australia Poland Switzerland New Zealand Korea Slovenia Germany Canada United States Japan Ireland Chile Mexico United Kingdom 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% pension benefit as percent of average income in OECD countries*, 2014 Source: Sarit Menahem Carmi and Ayal Kimhi, Shoresh Institution Data: OECD Pensions at Glance 2015 * For males with mean earnings
Average monthly income – Women 30,000 25,000 20,000 15,000 10,000 5,000 0 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 by age and income decile, in 2013 shekels top decile decile 9 decile 8 decile 7 decile 6 decile 5 decile 4 decile 3 decile 2 bottom decile Age Source: Sarit Menahem Carmi and Ayal Kimhi, Shoresh Institution
Average monthly income – Men 30,000 25,000 20,000 15,000 10,000 5,000 0 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 66 by age and income decile, in 2013 shekels top decile decile 9 decile 8 decile 7 decile 6 decile 5 decile 4 decile 3 decile 2 bottom decile Age Source: Sarit Menahem Carmi and Ayal Kimhi, Shoresh Institution
Replacement ratio in the basic model* 110% 100% 90% 80% 70% 60% 50% 40% 30% -5.0% 20% -6.5% 10% 0% delaying retirement of women until age 67 men Average decline in replacement ratio from beginning work at age 30 women women men bottom 2 3 4 5 6 7 8 9 top Income decile Source: Sarit Menahem Carmi and Ayal Kimhi, Shoresh Institution * Replacement ratio for ages 25 to 62 (women) and 67 (men)
Cumulative management fees* 22.2% 19.9% 17.7% 15.7% 10.7% 9.4% 5.7% 5.1% men women men women men women men women as percent of accumulated savings default funds low management fees basic scenario maximum management fees Source: Sarit Menahem Carmi and Ayal Kimhi, Shoresh Institution * Management fees valued at end of saving period.
Earmarked bonds: • 30% of pension deposits up to 20.5% of twice the average wage. • Real interest rate of 4.86% - much higher than market rates. • Interest subsidy is slightly progressive. • Proposed changes: • Age method: 30% from age 50 to retirement age and 60% for retirees – lower pension risk. • Wage method: 40% for all up to 10.25% of twice the average wage – slightly higher replacement rate. • Combined method.
Policy implications • Raising female retirement age after examining who will be affected and offering safety nets. • Indexing retirement age to life expectancy. • Removing unnecessary tax benefits. • More progressive allocation of earmarked bonds.
