Over a period of ten years, Israel's consumers paid NIS 5.3 billion to finance the pensions of retired Israel Electric Corporation workers. They paid through their electricity bills. At the end of the decade, after the entire NIS 5.3 billion had been paid, it turned out that Israel's consumers still owed NIS 5 billion to Electric Corp pensioners.
How could pension liabilities to these people have doubled in ten years to a total of NIS 10.3 billion? One can find some grounds in the theory of actuarial calculations, but there's another explanation, which is now being investigated by the watchdogs of the Finance Ministry, Public Utilities Authority and the Government Companies Authority. Namely, automated pay raises even after retirement.
The employment conditions at IEC assure the government company's 14,000 employees and pensioners automated advancement in rank and/or pay, based on nothing more than "time served."
The quality of their work, or their contribution to the enterprise are meaningless as far as automated rank and pay raises are concerned. An Electric Corp worker will crawl up the corporate ladder pay-wise whether deserving or deadbeat, or, now it turns out, whether alive or dead.
That is because the pension the worker's bereaved spouse receives also continues to increase automatically.
Thus a woman retiring as an ordinary secretary will, over time, achieve the pay of a bureau manager. A manager will creep up to the pay of a veep.
This method of advancement must surely be unique to the Electric Corp, not only in Israel but worldwide. I know of no other employers that continue to jack up pay for their workers after retirement, let alone after they're dead.
It is that unique remuneration model that has created another phenomenon unique in the annals of economics: Pay at IEC rises by an average of 4% a year when the workers are active, then the pace slows to 2% a year (after inflation) from retirement, on average. Yet just a year ago, the government and Histadrut labor federation signed a new collective bargaining agreement covering the entire public sector, which stated that pensions would be linked to the consumer price index. To compensate for erosion of pension stipends in recent years, the public-sector pensioners were to receive a one-time compensation amounting to 12%.
So, public-sector retirees barely manage to keep pace with inflation. But Electric Corp retirees see their pensions grow by 2% a year in real terms, which means after inflation and above the consumer price index to boot. Every year. After 20 years of retirement, the public-service pensioner still has the same pension in real terms, but the IEC retiree's pension is 43% higher, in real terms, than on the day of retirement.
That's the way it works in an enterprise that employs a unique mechanism for post-retirement employee advancement. While in the public sector, and in fact, throughout the world, the rank of an employee remains unchanged after retirement - with the sole aim of ensuring that pension rights are not eroded - Electric Corp rejoices in promotions and pension hikes of 43% in real terms.
The company attempts to explain this unique arrangement. One argument is that the average retiree is actually promoted two to three ranks over the course of retirement, since are near the pinnacle of the salary ranks before their retirement, while still employed. (In other words, Electric Corp workers are promoted all of the time, no matter what.)
The company also says that the arrangement intends to compensate retirees for the fact that most salary increases in Electric Corp don't roll over to pensions, so that if workers' salary rank remained unchanged after retirement, their stipends would be eroded. Another explanation links the arrangement to the periods of hyper-inflation that Israel has experienced and the company's attempt to protect retirees from inflationary erosion of their pension stipends.
All of the explanations are true, but another thing that is true, is that in fact, Electric Corp pensions are increasing at a rate of 2% annual in real terms - sui generis both in Israel and the world.
And it is also true that the wages regulator was unaware of this automatic advancement, so that is seems clear that at least some of the advancement is irregular. And it is also correct that the cost of this automatic advancement is estimated by the wages supervisor at some NIS 4 billion to NIS 7 billion in pensions. (The Electric Corp takes exception to this estimate.)
In other words, about a quarter of the Electric Corp pension liabilities, which are supposed to be borne by electricity consumers through their electricity bills, derive from this extraordinary arrangement.
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