Tax Decrees in Israel Will Drastically Curb Pension Saving, Warn Experts

Treasury planning to savage tax break on long-term savings for high earners.

Pension saving will contract sharply due to Israel's Finance Ministry's plan to drastically scale back tax benefits for savers with salaries of more than NIS 15,000 a month, say senior pension advisers.

The budget draft calls for lowering the cap at which savers are eligible for tax benefits to NIS 15,000, down from the current NIS 35,000 (all figures are in gross terms).

The treasury's plan is fueled by the desire both to cut the cost of these tax benefits to the state, as well as the principle that the state should not be granting so many benefits to the best-paid citizens.

In many cases, a worker's salary for pension purposes is calculated as only a certain percentage of the total salary, so a cap of NIS 15,000 means the change will likely impact people who earn at least NIS 18,000 to NIS 20,000 a month.

The treasury expects the change will save at least NIS 1 billion a year, which will help cover the increase in benefits for people who earn NIS 9,000 to NIS 15,000 a month.

However, pension advisers say the change could push higher-wage earners to cut back their pension savings to the rate they would be saving if they earned only NIS 15,000 - the portion still covered by tax benefits. Instead of being saved, that money would go toward consumption, which is an undesirable change as far as the economy goes, they say.

They note that this is likely to hurt the middle class, not just the upper class. Due to the high degree of uncertainty and variance in the job market, many people who earn salaries upward of NIS 15,000 do so only during their peak earning years, between the ages of 40 and 55, they note.

Provident funds and executive insurance funds also will take a hit, since these savings vehicles are used primarily by people who earn more than the NIS 15,000 cap, the industry sources add.

Bloomberg