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The Finance Ministry is considering making public sector workers contribute more toward the heavy costs of their state-funded pensions.

As part of the 2006 budget bill that was discussed and approved by the cabinet last week, a bill to the effect of increasing personal pension contributions in the public sector was also passed by the cabinet.

According to the proposal, the government will first attempt to reach an agreement with the Histadrut labor federation over what will effectively reduce the workers' take-home pay by 3.5%, though if this fails after three months, the treasury plans to take the proposal straight to legislation. The assumption is that with the threat of legislation looming over negotiations, the unions will accede to the proposal.

The treasury's problem lies in coping with the vast cost of publicly funded pensions. The pensions of some 212,000 individuals working in the public sector and 131,000 retirees are covered by the state. This means they are non-contributory, and have no reserves set aside to cover their costs.

The cost of these pensions, that is the actuarial liabilities of the state in respect of the budget-funded pensions, now stands at NIS 416 billion, which is almost the entire size of gross domestic product, while the annual cost each year of paying the current pensions stands at around NIS 10 billion.

It should be noted that the Histadrut-run pensions funds, faced with debilitating actuarial deficits, were forcibly nationalized several years ago, and yet their liabilities were only one-quarter of the state-funded pensions.

The pension threat hangs over the treasury and is one of the reasons why five years ago the state stopped the non-contributory pension plan for new state workers and is still attempting to reduce the conditions for those covered by the existing plans.

One such amendment was that all state workers covered by the state-funded pensions, started contributing 2% of their wages toward the costs of their pensions in 2003, and the treasury is now proposing that this be increased to 5.5% of their wages. This would bring the state workers partly in line with private sector workers, who contribute between 5.5% and 7% of the wages to cover their pension plans.

For the workers, this will mean a 3.5% reduction in their take-home pay and for the state, a saving of NIS 95 million for each 0.5% increase in the contribution.