The supervisor of insurance in the Finance Ministry has put together a far-reaching program of progressive reforms in the state's pension savings incentive initiative - but it's hitting a concrete wall in the form of the ministry's budget division.
The most daring component of Oded Sarig's plan would shift the incentive for the lowest earnings brackets, from one based on tax credits to one based on matching payments. It calls for the state to contribute 35 agorot for every shekel that employees deposit in their pension accounts.
By definition, the current, tax-credit-based incentive plan benefits only those employees who earn enough to actually pay income tax out of their salaries. Only the top 50% of wage earners fall into that category - meaning the poorest workers, the ones who genuinely need help in order to save, are ineligible.
The bottom 50%, meanwhile, have seen their disposable income drop as a result of a law that went into effect in January 2008, requiring all workers to pay into a pension plan.
Matching funds would, of course, put a significant dent in the state budget. To offset this, Sarig seeks to lower the tax credit ceiling for higher-earning savers, effectively increasing their tax bills.
The treasury's insurance czar also wants to replace the mandatory withholding of a certain percentage of employees' annual wages for pension saving with a lifetime pension goal for each worker. The idea is to give workers more control and flexibility over how they choose to put money into their retirement nest egg.
The Finance Ministry's budget division, headed by Udi Nissan, is fiercely opposed to the reform, which it claims will create a new and unnecessary type of government handout. Budget officials also suspect that the withdrawal of tax breaks for the rich, that is seen as making the reforms possible, will actually be an impossible sell.
Another concern raised by the budget division is that pension portfolio managers will take a sizable bite out of the state largesse in the form of management fees.
Instead of subsidizing retirement savings for the lowest earners, budget division officials support a simplification of the tax credit structure for pensions. Nor do they object to the principle of setting objectives for lifetime retirement savings, they say. But they do want some restrictions imposed on would-be grasshoppers, who might be tempted to postpone indefinitely the starting date for their saving deposits.
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