Mandatory Pensions May Hurt the Poor, Says Deputy Governor

The Bank of Israel's deputy governor, Professor Zvi Eckstein, has reservations about the Finance Ministry's proposal for mandatory pensions.

Eckstein emphasized that the proposal is extremely important in principle, but said it needs to be implemented very carefully, since it has the potential to seriously harm society's weakest sectors. Eckstein, who specializes in poverty and labor economics, warns that it is wrong to force mandatory pensions on workers earning less than NIS 4,000-5,000 a month, as this would only harm them.

Eckstein's main reservation is that the negative income tax will end up financing the mandatory pensions for the lowest wage earners.

"A person who earns NIS 3,500 [a month] as a single provider," explains Eckstein, "has no need to save for a pension. In any case, the guaranteed income allowance that is provided today after retirement age reaches NIS 2,000 a month. This means that he and his wife will together receive, after their retirement, about NIS 3,500-4,000 [a month]. This is more than the same family is earning today, when they may also have to provide for children out of that single salary. Therefore, it is simply not economically correct to give such a man an incentive to save for a pension, and whoever encourages him to save for a pension at the expense of his present income - is doing him an injustice," explained Eckstein.

The deputy governor suggests that the view that living on guranteed income allowances pushes the elderly into poverty - is wrong. "Whoever earns NIS 10,000 [a month] and does not save for a pension, so that he ends up retiring onto a NIS 2,000 guaranteed income allowance, is truly living in poverty. But that is not true for someone who has earned NIS 3,000 or NIS 4,000 all his life, and supported an entire family with this sum. From his viewpoint, to support just himself on NIS 2,000 after retirement will not worsen his situation. On the contrary, his situation will even improve," explained Eckstein.

Eckstein says that the view that Israel has a serious poverty problem among its elderly is incorrect. "They are the same poor that existed beforehand. Only before they had families, and the entire family was poor, and now they are elderly poor. Their number has not changed, only their definition in our statistics has changed," said Eckstein.

He further states that forcing these poor people to save for pensions will only make the situation worse. On one hand, they will become poorer now, for the purpose of improving their lot after retirement - when their situation would actually otherwise be better than it is today, when they are supporting a family.

"By increasing their pensions, the result will be that their situation in retirement will be better than it is at the present. Why?" asks Eckstein.

An additional worry, he says, comes from the fact that the Finance Ministry has combined the financing of mandatory pensions for the poorer sectors with the negative income tax. The result is that the negative income tax will lose its value as an incentive for the unemployed to go out and seek work. Additionally, since mandatory pensions will increase the cost of hiring unskilled labor, implementation of the plan is likely to hurt the chances of the poorest classes to find work - making them even worse off.

Eckstein recommends improving the pension situation of Israelis by raising the guaranteed income supplement for those who were employed during their working years.