Israel's Finance Ministry Mulls Plan to Take Over National Insurance’s Budget

Plan aims to make social-spending budget more transparent and highlight demographic challenge Israel faces.

Nir Kafri

In a dramatic change for the National Insurance Institute, the Finance Ministry is preparing to roll most of the operations of the government body into the state budget, a plan that is expected to arouse strong opposition from the NII.

The chief aim is to create more transparency about Israel’s social-welfare spending, in particular to alert decision makers and the public to the NII’s growing deficit. Greater transparency, officials hope, will give politicians second thoughts about increasing allowances if it means cutting spending elsewhere in the budget.

The plan is still in the early stages of development, but treasury sources told TheMarker that they would be presented to the next finance minister, who is most likely to be Moshe Kahlon.

The NII is almost certain to oppose the change, which would harm its independence, enshrined as that of a statutory government body. However, the Bank of Israel is believed to favor the measure on the grounds that the NII isn’t really independent financially because a third of its budget comes from the government.

The Israeli equivalent to America’s Social Security Administration, although dispensing a much wider range of benefits, the NII (know in Hebrew as Bituach Leumi) has a 74 billion-shekel ($18.7 billion) budget for this year.

Most of that comes from direct contributions Israelis pay from wages and other earned income, but 11 billion shekels is covered entirely from government funds and another 18 billion shekels partly covered from the budget. How different NII allowances are funded is based on a hodgepodge of rules amassed over the institute’s 60-year history.

Whatever the funding, until now the NII itself has operated completely outside the state budget, treated as a business operation with income and expenses. That has meant that some 60% of its spending is off the government’s books.

Since 2011, the NII has been running an operating deficit, meaning it has been paying out more benefits that it takes in from payments

Right now the deficit isn’t large and isn’t expected to grow significantly over the next three decades because of a fund made up of accumulated surpluses in the years before 2011. However, it will begin to show an actuarial deficit in about 30 years.

For the past four years, treasury officials have been struggling with how to eliminate the deficit, among other ways by requiring that every increase in benefits – such as child allowances, which the ultra-Orthodox parties want to increase as a condition for joining the coalition – be matched by either new revenues or cuts to other benefits.

The matching proposal was ultimately rejected by officials as being politically unfeasible. Instead, they are now examining merging the NII budget into the state budget over a period of years so that the government funding grows from the current 40% to 100%.

Rolling the NII’s budget into the state budget wouldn’t bring with it any automatic change in the benefits it pays out or in the NII’s legal status. However, it will give policy makers and the public a greater awareness of the demographic challenge Israel faces in the coming decades as the population ages and old-age and nursing payments increase.

Among the critical issues the government faces is whether to raise Israel’s pension age, a measure that would save public pension costs. In fact, the NII estimates that a higher pension age would eliminate its deficit altogether.