Raising the Israeli Retirement Age: Grand Larceny

How the treasury effectively transfers capital from the have-nots to the haves.

Last week the Yedioth Ahronoth daily reported about the next austerity measure, courtesy of the Finance Ministry.

Under the optimistic-sounding headline “Work is our life,” Gad Lior wrote that the ministry intends to raise the retirement age for women from 62 to 64 and for men, from 67 to 70. A ministry official explained that the proposal was a response to the increase in life expectancy.

As is the habit among regulators in Jerusalem, this ministry official was telling the truth. But he didn't go to great lengths to tell the whole truth.

He’s not telling all when it comes to the causes of the actuarial deficit or alternative ways of dealing with it, or about the social and economic consequences of raising the retirement age for hundreds of thousands of Israelis, or particularly the political implications of such a move.

Actual consequences be damned

The ministry and Yael Andorn, its director general, don’t bother to inform the public about the actual consequences of a step like this. Stated in more familiar terms, the real question is the extent of the haircut that Finance Minister Yair Lapid’s office intends to impose on members of the public.

This is the same Lapid who got appointed to his current post after promising to improve the lot of the middle class, but stabbed them in the back as soon as he took office.

Raising the pensionable retirement age means that men and women would lose two or three years during which they are due to receive a pension, based on their earnings and the amounts they accumulated in their pension funds from their salaries over the decades. Deferral of pension payments without other compensation inflicts a real loss on these people, just as deferring corporate payments to bondholders without boosting the interest on the debt does as a result of the loss of interest on the money they were supposed to get.

A deferral of the start of pension benefits inflicts overnight damage upon future retirees, because it forces them to lower their standard of living now to compensate for the folly of their prior reliance on the government’s promises. A hike in the retirement age also increases the likelihood that a pension account holder would actually die before receiving a penny in retirement benefits from his pension fund or from the National Insurance Institute.

The Finance Ministry actually doesn’t want to deal with one of the major reasons for the actuarial deficit in the old-age pension sector − that an increasing proportion of the population reaches old age without having been part of the workforce. This group of people hadn’t made a substantial contribution in any event to the National Insurance Institute’s coffers, even though they are to draw old-age benefits from them like everyone else. This year the NII will pay 27 billion shekels ($7.7 billion) in old-age and survivors’ benefits, and in the process create a 1.4 billion shekel deficit.

The low workplace participation rates in the ultra-Orthodox community, particularly among men, and low average wage due to the unsuitable educational backgrounds of those who do work, create a deepening actuarial hole as a result of the community’s high birthrate. And the Finance Ministry, including the budget division where Andorn worked for many years in senior positions, collaborated in the charade involved in perks provided to members of the ultra-Orthodox community by government ministries and the NII rather than dealing with this tough political issue.

From the ministry’s standpoint, it’s easier to make someone who has worked for 44 years stay in the job market. And that’s despite age discrimination in the workplace and the fact that the older worker may be weaker physically and less adaptable to rapid technological changes.

The senior Finance Ministry official explains that people between the ages of 62 and 67 are at the height of their powers and that forcing retirement upon them is an unforgivable injustice to them and the economy. Other examples of such pretensions of innocence and shameless falsehood would be hard to find. If working at retirement age is such a major treasure, why do people that age so often get booted out of their jobs by their employers at the first possible opportunity? Could it be that they know something that Andorn doesn’t, or is this another case of officials in Jerusalem knowing what’s good for business owners better than they themselves do?

It’s a shame Andorn doesn’t take advantage of her connections at the Central Bureau of Statistics and get a statistical analysis of unemployment rates based on the age of retirement from the workplace. For instance, what proportion of the staff at high-tech companies is over 50? How many women, or men, who apply for jobs and note their age as at least 45 get called in for interviews? And how many then get job offers?

Unmentioned option

When Andorn or her senior ministry colleagues talk about the major loss to the workforce in setting a retirement age at 62 or 67, they don’t mention that most of the job options of people in this age bracket involve working as a parking lot attendant or stocking shelves at a supermarket.

Andorn and her colleagues don’t even bother mentioning another option that could close the actuarial gap, or at least narrow it: Last year the government made 20.8 billion shekels in payments for so-called defined benefit or budgetary pensions, which are paid out directly by the employer − in this case the government − and are not subject to the vagaries of interest rates or higher life expectancies. And they are based on the employee’s last salary. This year the government will shell out another 22.8 billion shekels on this type of pension − and that doesn’t include government-funded institutions like universities, the Bank of Israel and local government.

And when it comes to the defined-benefit pensions, until 2005 neither the employee nor the employer set aside a penny in connection with these plans. Since 2005, employees only pay in 2% of their salaries, which is 63% less than what is deducted for newly-established private pensions and 71% less than older so-called veteran pensions that were nationalized as part of a pension reform.

The defined-budget pensions are made available to government employees including Finance Ministry staff, as well as entities funded directly or indirectly by the state. This includes municipal employees, workers at government companies such as the Israel Electric Corporation and employees of the Israel Prison Service, Hebrew University and Tel Aviv University, and the Bank of Israel, which is currently headed by a bank governor who’s another ardent supporter of raising the retirement age.

The defined-budget pension arrangement was ended in 2005, but anyone hired by one of these entities by the end of 2003 is still entitled to the benefit until they retire, and the state is expected to bear the expense of these pensions until 2070. The government’s actuarial obligations for defined-budget pensions is thought to be a whopping 675 billion shekels, and the annual amount that the state will have to pay for this is expected to peak at 29 billion shekels in 2036. But Andorn, who has worked at the Finance Ministry for years, doesn’t even mention addressing this problem instead of, or in addition to, raising the retirement age.

This isn’t the first time the Finance Ministry is granting financial immunity from a haircut to its associates. At far back as 2004, the retirement age for men was raised from 65 to 67 and then too not a penny was taken from defined-benefit pension holders. So the ministry is leading a two-stage process in raising the age by five years over the next 11 years, along with a haircut of tens of billions of shekels, without the defined-benefit pension holders contributing at all to closing the actuarial gap.

What is being carried out here is a transfer of capital, or to put it less delicately, robbery committed against one group of citizens − the ones who worked for decades under conditions of job insecurity − for the benefit of another group of citizens. As of 2012, that second group consisted of 98,000 people, not including the defense establishment, police officers, jail wardens and the staff of other entities including universities. That favored group enjoys full job security and the right connections to the power structure.

Reuters
Olivier Fitoussi