For First Time Since 1980, Israel's National Insurance Institute Won’t Give Surplus to Treasury

National Insurance Institute director general cites 'objective distress,' saying within a few years income will be smaller than payments

National Insurance Institute branch in Tel Aviv.
Nir Kafri

The National Insurance Institute has canceled a four-decades-old agreement under which the institute’s surplus revenue was transferred to the Finance Ministry every year to help finance the state budget.

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NII director general Meir Spiegler informed the treasury last week that he was canceling the agreement as of the start of 2019. He said the institute’s finance committee and its full board had both unanimously approved a professional recommendation to scrap the agreement.

The theory behind the agreement, which dates from 1980, was that instead of the NII saving up its surpluses, the state could use them, and in exchange, should the NII ever run a deficit, the treasury would make up the shortfall. But the NII says there’s no guarantee that the treasury would actually pay up, which could leave it unable to pay legally mandated benefits such as welfare, unemployment, disability and old-age allowances.

An actuarial report predicts that the NII will start running deficits in 2022 and run out of money completely by 2037. As of the end of 2017, its actuarial deficit – meaning its future obligations minus its assets – stood at 440 billion shekels ($123 billion), up from 403 billion shekels a year earlier.

In an interview with Haaretz on Wednesday, Spiegel said that under the terms of the 1980 agreement, either side can cancel it; the only requirement is that notice be sent at least three months before a new calendar year begins, meaning by the end of September.

“We’re talking in the neighborhood of 25 billion shekels a year, comprised of surplus income, interest and bonds that reached maturity,” he said. “We’re in objective distress, since within a few years – by 2022 – our income will be smaller than our payments, and then we’ll need money from the Finance Ministry to meet our obligations.”

And at that point, he added, he fears the treasury won’t pay up.

“They’ve taken the insurees’ money and used it for Israel’s ongoing expenses,” he said. “Money that was supposed to be used only for the benefit of the insurees was used for other purposes. Not one shekel of the insurees’ money that we transferred to the treasury was preserved, because there’s no dedicated fund. The money was regularly used for the state budget.”

Canceling the agreement is just one of several steps the NII will have to take to prevent its collapse, he stressed.

Regarding claims by senior treasury officials that he and Labor and Social Affairs Minister Haim Katz, whose ministry is responsible for the NII, won’t manage the money efficiently, Spiegler pointed out that neither he nor Katz will be managing the money; that will be done by a professional investment committee which the institute will set up.

“The National Insurance Institute insists that it be managed independently and not be dependent on the Finance Ministry,” he said. “The institute is a responsible agency that has the tools to deal with temporary deficits. We’ll invest the money, and we believe the professional committee that will be appointed for this purpose will be able to produce higher yields than that produced by the agreement with the treasury, which is about 2.9 percent – lower than the yields at most Israeli financial institutions.”

A source close to Spiegler said the latter’s July interview with Haaretz reporter Nir Gontarz helped sway the decision in favor of canceling the agreement, by persuading many influential people, as well as members of the general public, that maintaining it didn’t make sense. In that interview, Spiegler warned that the NII might be unable to meet its commitments in the future.

Katz informed the other ministers of the agreement’s cancelation at Wednesday’s cabinet meeting. But Spiegler sent the official notification a week ago.

Spiegler noted that most of the NII’s revenue comes from the social security taxes paid by Israeli workers. The NII is then supposed to use that money to make statutory payments such as unemployment and disability.

“Payments made to the institute today are supposed, among other things, to guarantee the insuree’s rights in another few decades, when he needs them,” Spiegler stressed.

In 2009, a committee was set up to explore ways to maintain the NII’s financial stability. This committee, Spiegler said, recommended unanimously that the NII manage its surplus revenues independently rather than transferring them to the treasury.

This recommendation was strengthened by “an in-depth study that examined, among other things, the way comparable systems in the Western world are managed,” he added.

To prove his contention that the treasury isn’t upholding its side of the bargain, Shiegler cited two examples. The first, he said, was the treasury’s refusal to fund the shortfall in the NII’s unemployment compensation department.

The deficit stemmed from a decision made in the 1970s to slash employers’ NII payments – a decision which the NII had warned at the time would result in a deficit. To protect against this possibility, the government amended the National Insurance Institute Law to include a guarantee that the treasury would cover any future deficits in the unemployment compensation department.

“Nevertheless, when this department ran a deficit for the first time in 1999, the treasury ‘froze’ this provision of the law temporarily, and continued doing so from time to time until it was finally canceled,” Spiegler said. “The result is that the treasury never bore the cost it was supposed to bear, and the department developed a cumulative deficit that is estimated to date at about 75 billion shekels.”

The second example is the treasury’s refusal to finance a payment made to hospitals for every baby born. Prior to enactment of the National Health Insurance Law in 1995, these payments were supposed to come out of the government’s health budget, Spiegler said, and after its enactment, the health maintenance organizations were supposed to use their own government funding to cover them. But in reality, the NII continued to finance these payments until 2015, creating a cumulative deficit of 50 billion shekels, he said.

These two issues alone have thus created a cumulative deficit of 125 billion shekels, Spiegler added.