Eini's Folly

Even before we had time to peruse the economic stimulus plan, Histadrut chief Ofer Eini had time to announce that there was nothing in the plan and that the labor federation would have no choice but to "embark on a struggle to the point of a general strike." "The free market has wiped out the workers' savings," Eini added. "In 2003 the Finance Ministry abolished the pension safety net and now it must restore it."

In Israel you can say anything. There is no tax on words, even if they are distorted and mislead the public. Have savings really been wiped out? Was it the treasury that harmed pensions?

Savings are not wiped out. Enough with the scare tactics. For five years, from 2003 to 2007 those saving in provident funds earned 65 percent on their investment. In 2008 the hurricane arrived from the United States and caused drops. As a result, losses this year will reach about 25 percent. In other words, pensions have not been erased. Savings have not been wiped out. Profits have simply been cut.

But who really harmed the public's pensions? For that we have to go back to 2003 and recall why then-finance minister Benjamin Netanyahu had to deal with the provident funds. Netanyahu was forced to get deeply involved because of the Histadrut's "excellent" management, which brought the provident funds it was managing to the brink of bankruptcy. One fund actually did go bankrupt: the Construction Workers Fund. The other funds were on the road to collapse.

All that happened because for decades the Histadrut had a ball with pension-fund members' money. It used the money earmarked for pensions for various and sundry political purposes. The funds were forced to lend the Histadrut big money at non-linked interest rates, so the value of the loan gradually eroded.

The Histadrut granted preferable pension conditions to activists and the well-connected, at the expense of the funds' other members. It financed workers' councils all over the country as well as Na'amat, Hapoel, the Working Mothers Organization, the Hanoar Haoved Vehalomed youth movement and Mishan centers - at the expense of pension money. The Construction Workers Fund, which was small and poor, employed 450(!) workers, and those with political connections received exorbitant salaries and a company car. The fund had 51(!) branches all over the country. Is it any wonder it went bankrupt?

This was stealing the fund members' money. This was institutional corruption; if a private pension fund had handled its members' money this way, all its directors would have been convicted and sentenced to prison.

The 2003 plan to nationalize the pension funds saved the situation. It cost the state NIS 80 billion and saved the pensions of hundreds of thousands of workers. In other words, it was the good-guy Histadrut that erased the "workers' savings" and the bad-guy government that saved them.

But Eini wants to turn back the clock to the years when the government provided government bonds to the pension and provident funds. But already in 1987 (and not 2003) a process began of transferring the provident funds from investment in government bonds to investment in corporate bonds. This process, which ended in 2001, enabled the economy to grow, because provident funds are the ones (everywhere in the world) that grant long-term loans to companies for investing and growth. In 2003 this process for the new pension funds was accelerated, a reason for the accelerated growth of recent years.

Eini is demanding that the government immediately deploys a safety net for public savings. That is a particularly problematic demand because these savings are worth about NIS 400 billion, so the state is liable to assume obligations that would bring it down. Does Eini understand that every billion shekels channeled to members of the pension and provident funds will be taken from welfare, health and education? After all, the budget is limited. Moreover, providing a safety net will lead to riskier management of these bodies in the future, because there will be a government guarantee to cover any loss. Is Eini aware that no country in the world has deployed such a safety net?

But who cares about the facts? It's all politics. It's all cheap populism. It's all an egregious lack of responsibility.

And Eini continues: "We now have to pour in big money, to enlarge the budget, not by 1.7 percent as proposed by the treasury, and not even by 2.5 percent, but by a higher rate. We must release the reins." That is the biggest mistake that could possibly be made now. Budgetary restraint has kept our heads above water. Budget discipline has spurred growth in the past five years, and that is making it possible to enjoy macroeconomic stability in a turbulent world.

If Eini's recommendation is accepted and we "pour in money," the deficit will immediately be altered and the crisis will erupt like a volcano. Israel's credit rating will be lowered, foreign investors will flee, the public will adopt defensive behavior and stop consuming, inflation will worsen, interest rates will soar, and the economy will descend into a deep and difficult recession.

Is that what Ofer Eini wants for us?