Israeli Government Savings Program Was Meant to Reduce Inequality. It Did the Opposite

Affluent families take better advantage of the savings plan, which deposits a monthly payment to every Israeli child in an attempt to reduce the impact of poverty on choices available to them later in life, study finds

Or Kashti
Or Kashti
A National Insurance Institute branch in Tel Aviv last year.
A National Insurance Institute branch in Tel Aviv last year.Credit: Ofer Vaknin
Or Kashti
Or Kashti

A study commissioned by the National Insurance Institute (NII) has found that a financial savings plan for children, meant to reduce the impact of parental poverty on choices available to their children later in life, only increases the disparities among different groups in Israel.

Under the plan, initiated in 2017, the government deposits 52 shekels a month per child in a special savings plan. Children are registered automatically, with parents having a choice of doubling this amount by using some of the monthly child benefits they receive.

Parents can then choose between different available investment options. The children can withdraw funds at the age of 18 (with parental consent) or 21 (without consent). The plan was part of a coalition agreement between Netanyahu and the ultra-Orthodox parties, following earlier cuts in child benefits. The plan costs the state 2.7 billion shekels ($830 million) a year.

Parents can opt to have the savings deposited in a special bank account, which yields lower interest rates than the other investment options do. Among those other options are low, medium or high-risk investment funds, as well as funds supervised by Jewish, Christian and Muslim religious authorities. Studies based on NII figures have found that more affluent families take better advantage of this plan, ensuring better future financial returns, in contrast to the intention of the plan’s designers.

“One can impact choices made by parents by using the principles of behavioral economics, such as sending reminders through text messages, the designing of information pages, and more. Small and cheap changes can have significant impact,” says Prof. Michal Grinstein-Weiss from the Social Policy Institute at Washington University, who conducted the study for the NII.

Grinstein-Weiss says that expected returns can range between 12,500 and 73,000 shekels, depending on choices made earlier. Apparently, only two thirds of parents chose investment streams, with 64.5 percent choosing to double the amount deposited by the government. Among [non-Haredi] Jewish parents, 74 percent opted to double this amount, with only 50 percent of Haredi and Arab parents opted to do so.

Some 35 percent of non-Haredi parents chose to invest in the highest-risk fund, which is most likely to give the highest returns, in comparison to 7 percent and 3 percent among Haredi and Arab parents, respectively. Some 75 percent of Arab parents chose to have their children’s money invested in a fixed-interest track, which offers relatively low returns.

Furthermore, 60 percent of parents in the upper two deciles chose to double their children’s investment, versus 20 percent in the lower two deciles. Some 52 percent of parents in the top two deciles chose the high-risk, high-returns fund, versus 8 percent of parents in the lowest two deciles.

These figures show how parents’ choices can amplify inequality, wrote Grinstein-Weiss.

Critics of the plan claim that the conception that poor people don’t save for the future and need to be taught through coerced savings plans is basically flawed. “They’ll save when they have the resources,” said one source.

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