Study: Israeli Child Savings Plan Worsening Inequality

National Insurance Institute says wealthier families more likely to earn 2-3 times more than poorer ones over 18 years

National Insurance Institute offices in Rishon Lezion, March 2018.
Ilan Assayag

A government program launched more than two years ago to give every Israeli child a nest egg isn’t having its intended impact and helping to reduce income inequality and boost social mobility, the government’s National Insurance Institute said in a report issued on Sunday.

Under the Child Savings Plan, the government opens a personal savings plan for every child at birth, depositing 50 shekels ($14) every month until he or she turns 18. Parents can match the state’s contribution. 

While they have the option of selecting which private sector fund manager will manage the investment, if they don’t decide within six months of a child being registered, the government assigns them a default manager. But as an NII study presented at a conference last week showed this was creating even wider income gaps.

The research showed that in the case of children for whom the full amount is deposited over 18 years, the average savings was expected to reach 24,000 shekels. But a related study shows that among the top 20% of families by income and education, 76% kicked in the extra 50 shekel a month while among the bottom 20%, only 32% did. That can make a very big difference in what the child receives when he or she turns 18.

“The additional 50 shekel deposit every month by the families can be expected to at least double the total savings and depositing the savings with a higher-risk plan, which generates a higher return over the long term, could even triple the amount compared to an ordinary bank savings plan,” the NII said.

Dr. Ofir Pinto and Prof. Daniel Gottlieb, the authors of the study, said the terms of the program should be revised, among other things by increasing the government’s contribution for the lowest-income families. The government would have to decide whether to condition the increased aid on whether the family makes its 50 shekel contribution or simply to offer it to the poorest 20% of families.

Another option, they suggested, it that the default plan not be a risk-free bank savings option, at least until the child turns 15. “A change like this would eliminate the expected gap in economic inequality compared to how the program has been implemented up to now,” the report said.
Nimrod Sapir, a lawyer for the Association of Investment Houses, said the study showed the need to improve financial education in Israel. 

“We need to act in a way that people from lower income groups also know how to take best advantage of the benefits built into the Child Savings Program,” he said.