The Bottom Line / Looming threat of old age
Two weeks ago, the Finance Ministry announced its intention to grant guarantees to the Trade Bank customers, but emphasized that it would be "the last time" the state provided insurance for clients of a failed bank.
Two weeks ago, the Finance Ministry announced its intention to grant guarantees to the Trade Bank customers, but emphasized that it would be "the last time" the state provided insurance for clients of a failed bank. This threat is meant to prod the Bank of Israel into establishing a mechanism of deposit insurance that would transfer the burden of compensation from the public coffers to bank depositors.
The treasury's "last-time" declaration was intended to completely uproot the established norm - according to which the state finances compensation for those hurt by bank failures - and to organize formal insurance instead. As long as the state provides de facto guarantees to bank depositors, it is faced with a potential threat of enormous proportions.
But while the treasury is trying to remove a future budget obstacle from its path, it is acting, at the same time, in a way that inserts another heavy item into the budget - financing the deficits of the old pension funds controled by the Histadrut labor federation.
In the 2003 state budget, for the first time, there is a clause allocating money for pension payments to the Histadrut's fund for construction workers. This entails several hundreds of millions of shekels. During the coming years, the burden on the public purse will grow as additional pension funds exhaust their assets and are unable to pay their pension holders.
It is possible that the financing of the pension payments to the members of the construction workers' fund will become a norm and the Israeli public will become accustomed to this, continuing to depend on the public coffers to cover the deficits of the rest of the funds. But this burden - totaling some NIS 56 billion and equivalent to about a quarter of the state's annual budget - is too heavy to bear. Furthermore, this deficit is likely to grow if certain trends continue, including increased life expectancy, lower birthrates and large numbers of elderly immigrants.
The pension market urgently needs a recovery program. Many of those involved in this field believe that now is the time to begin the process of reducing the deficits, removing the obstructions to competition and improving management in the pension arena.
The problem of deficits is the most urgent and threatening of all. To tackle this problem, it will be necessary to increase the fees paid by pension holders, raise the retirement age and reduce the rights of pension holders. Increasing fees would appear to be the most problematic to implement in light of the situation in the labor market of today and concerns that this might increase unemployment. On the other hand, raising the retirement age seems like a correct step when considering that life expectancy has increased.
Modifying pension conditions (for the worse) would be a complicated matter, requiring consideration of parameters including age, retirement date (and the regulations in effect at that time) and the distribution of the burden between the weaker and well-established strata of pensioners.
It seems that the proper formula is to raise the retirement age and reduce the rights of pension holders, while charting a course for gradually eliminating the actuarial deficit in pension funds.
Any arrangement would have to include a reckoning with the Histadrut, which is responsible, as controling owner of the old pension funds, for at least some of the deficits. This primarily entails the assets of the funds that are registered in the Histadrut's name and past financial investments in Histadrut companies.
In order to implement the recovery plan necessary for the funds, it would be reasonable to take the management of the old pension funds out the hands of the Histadrut, or at least appoint committees to manage them along the lines of the committee assigned to the banks following the bank share scandal in the 1980s.