Israeli Families With Young Children Crushed by Financial Burden

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Prof. Michel Strawczynski Credit: Courtesy

Young working families in Israel are struggling under the financial burden of raising young children, but the support they receive from the government is especially low compared to parents in other OECD countries, reports the Bank of Israel.

The incomes of young working families with children are lower than their average incomes during their later lives, and their expenses are higher. This is why it is common practice in most advanced economies to assist such families with tax benefits, child allowances, subsidized services and other benefits. In Israel, this assistance to young working families is significantly lower than in other advanced economies, states the study.

The central bank’s research department released the study written by Dr. Adi Brender of the Bank of Israel and Prof. Michel Strawczynski of the Hebrew University in Jerusalem Tuesday.

The study found that the cash benefits provided in Israel for young families (defined as couples married up to 10 years with children up to age 9, where at least one of the parents works a significant part of the time), such as tax credits or child allowances, are markedly lower than their level in almost all other OECD nations, particularly for working families in the middle and lower income brackets. At the same time, the services provided to families with children, and other benefits such as tax deductions for child expenses, are also no higher in Israel than elsewhere.

The three main problems of the tax system in Israel that lead to the low level of assistance are the focusing of tax credits for children almost exclusively on mothers, the limited scope of the Earned Income Tax Credit program, and the relatively low level of child allowances, the study reveals.

The expenses for a family with a newborn baby will increase by an average of 664 shekels a month until age 3, or some 7,900 shekels a year. Families with small children cut back on other spending to pay for this. For children aged 4 to 14, the average monthly cost is 292 shekels, or about 3,500 a year. Children aged 15 to 17 are much more expensive, with an average monthly increase in expenses of 964 shekels, or some 12,000 shekels a year.

The rate of young families living in rented accommodations instead of purchasing their own home increases markedly, while among other families, this phenomenon is almost completely absent. This situation is true in most regions of the country and at all socioeconomic levels, reflecting the liquidity constraints of young families. During periods of housing price increases, the rate of young families renting a home increases significantly, while there is no similar trend observed among other families. The percentage of spending going toward housing for such families has doubled over the past 25 years.

Young working families in Israel maintain full-time or close to full-time employment for both parents, even during the initial parenting years, which is reflected in a steady increase in the parents’ wages. Because young parents have a steady presence in the labor market, policy makers could easily give them tax or other benefits during this stage in their lives. It is a common practice in other developed economies to provide tax benefits at the stage when the children are younger and offset these payments with higher taxes when the children are older.

Child tax benefits in Israel are focused on mothers, but about half of working mothers do not utilize these tax benefits at all because of their low salaries. A further one-quarter use only part of the benefits. In 58 percent of families, the father exceeds the income tax threshold and the mother has tax benefits left over that the family cannot use.

The study also found that in order to implement such a policy while maintaining a budgetary balance, it will be necessary initially to raise taxes on the older population that will never enjoy these benefits.

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