Bank of Israel hints Finance Ministry overstates non-contributory pension crisis
The central bank report hints that the "crisis" in fully state-funded non-contributory pensions has been overstated by the treasury.
The central bank report hints that the "crisis" in fully state-funded non-contributory pensions has been overstated by the treasury. Bank of Israel economists say that pension commitments to state employees in no way threaten the national budget in coming decades, and there is no justification for cutting benefits from these pension plans.
In a chapter dedicated to non-contributory pensions, the Bank of Israel notes that state commitments are estimated at NIS 740 billion, a huge amount that the treasury views as a time bomb threatening the state budget for generations to come. By 2020-2030, annual pension payments to former civil servants are expected to reach more than NIS 20 billion, and based on this threat, the state has ceased to provide non-contributory pensions, and replaced them with contributory pensions.
But the Bank of Israel questions the treasury's concerns. According to the central bank's analysis, and based on various assumptions of economic growth over the next 50 years, the burden of pension payments out of the national product is not expected to grow substantially.
This means that if the state currently spends 1.7% of its product in pension payments to civil servant retirees, this percentage will not increase to more than 2% at its peak, an addition of just 0.3% of the national product.
The central bank also criticizes the treasury's old-age stipend policy, saying that in light of the young age of the Israeli population, and low stipends, expenditures can be expected to increase from 2.8% to 3.4% at their peak, compared to 8% allocated to old-age stipends in most western countries.
In light of these findings, the central bank criticizes the treasury's decision to reduce benefits for non-contributory pension plans. The bank says that linkage of the pension stipends to the cost of living index, rather than the average wage in the economy, will cut stipends paid to civil servant pensioners by 13%-20% in 20 years time.