The government is drafting a plan to encourage people to work past retirement age, in light of current taxation and pension policies that essentially work out to a 97% income tax on some retirees.
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The plan was drafted by the Pensioner Affairs Ministry, led by minister Uri Orbach and ministry director general Gilad Semama, together with the National Economic Council in the Prime Minister’s Office. The proposal, estimated to cost NIS 240 million ($69 million) a year, would be funded by dropping the current pension increases offered to people who keep working beyond retirement age.
The Finance Ministry and the National Insurance Institute are reportedly wary of the plan, and have not yet voiced support.
The initiative is part of the NEC’s strategic plan to encourage Israelis to continue working until a later age, as life expectancies grow longer and the population ages. The number of retirement-age Israelis is set to reach nearly 15% by 2030, from 10% today, meaning the national expenditure on the elderly is likely to grow from the current 10.2% of GDP to nearly 12%, an increase of 16 billion shekels.
Surveys have shown that most people approaching pension age would like to continue working, but face barriers including discrimination, outdated skills and above all a taxation and state pension policy that serves as a strong disincentive.
Currently, retirement age is 62 for women and 67 for men. After retirement, pensioners receive an old-age stipend from the state.
Retirees under 70 who choose to continue working are penalized if they earn above 5,023 shekels a month. For every shekel they earn beyond that point, their old-age stipend is reduced by 60 agorot. They also pay 14% income tax on their salary, and also lose the right to negative income tax equal to 23% of their salary.
Taken together, a person past pension age earning between 5,032 and 6,025 shekels a month is essentially paying taxes equal to 97% of his or her salary, and would be better off not working. Between 6,035 to 8,530 shekels a month, the tax penalty works out to about 74%, depending on the size of the person’s old-age stipend. Beyond 8,530 shekels a month, these employees are no longer eligible to receive an old-age stipend.
After age 70, the old-age stipend is no longer conditioned on not working. But by that age many people have already retired anyway, deterred by the high penalty imposed on younger retirement-age people who choose to continue to work.
The NEC found that very few people beyond pension age choose to work at jobs paying more than 5,000 shekels a month.
The proposal recommends reducing somewhat the penalty for working. People who choose to work would forgo only 30 agorot of their old-age stipend for every shekel earned beyond 5,023 shekels a month, and the ceiling for receiving a stipend would be increased to 12,500 shekels a month, up from 8,500 shekels. This would cut the taxes and penalties for working to 44%-67% of the person’s salary.