If there's one subject that Finance Minister Yair Lapid needs to urgently do his homework on, it's pensions. Since stepping into the job he hasn't managed to grasp this complex subject, which is evidenced by the confused and contradictory decisions coming out of his office. A total lack of understanding of the pension market, lack of courage in addressing the real problems and an absence of a comprehensive perspective of the pension system are evident all around.
Lapid isn't alone. In many countries around the globe the pension system is collapsing due to trends like aging populations and rising life expectancies, widespread unemployment among the younger generation and huge budget deficits. But we have our own set of problems that Lapid needs to wrestle down. Without having to learn actuarial science or the ins and outs of pension plans, it would suffice if he instilled cooperation between two important domains inside his ministry: the budget division and the capital market division.
It was already clear when he submitted the proposed budget and Economic Arrangements Law for 2013-2014 that there has been no coordination between the two departments. This was when the budget division recommended canceling the tax benefits granted for pension contribution on salaries exceeding NIS 15,000 a month. The rationale behind this move was strictly fiscal: The budget division was looking for ways to narrow the deficit and was shooting blindly in all directions for ways to raise revenues, rescinding tax breaks being one of them. But ending the exemption didn’t just add extra badly-needed revenues, it would have taken away an incentive for people to save for their retirement — precisely the opposite of what treasury policy has been over the past two decades. Ultimately the proposal was dropped, perhaps because someone realized that reducing pension savings in an age of lengthening life expectancy and shaky job security is nothing less than a socioeconomic time bomb.
Last week the pension-saving public received another blow. The commissioner of capital markets, Oded Sarig, disclosed a proposal to reduce pension payouts to people retiring over the next few years who have their savings in the pension funds established during the 1990s. Here the reason is economically sound and justified. When the funds were set up, the calculations were based on the funds’ earning 4% a year, in accordance with returns on government bonds. But these rates have now dropped to the region of 2% to 2.5%. If Sarig doesn’t act, it would mean that those retiring in the next few years and receiving what they were promised would be doing so at the expense of younger people accumulating savings through the same pension funds. The plan is to cut pension payments for anyone retiring in the upcoming years by about 10%. But after Lapid came under criticism over Sarig’s plan, the minister assured the public it was just a proposal.
For pensioners Sarig’s plan would be nothing less than a painful financial jolt, so the plan would be carried out over three years, with the younger members of the funds bearing the cost. Sarig is acting responsibly here and it's hard to find any reason to complain. But it again brings us back to the way the Finance Ministry and its chief view the pension market as a whole.
Israel has several types of pension savings, but the main split is between defined contribution and defined benefit plans. Most Israeli workers are covered by defined contribution plans, funds that employee and employer set aside on a monthly basis and are invested in a pension fund. On reaching retirement, the employee receives what he saved according to how much money was accumulated in the fund over the years. If there's a deficit then pension payments are reduced. If there are surpluses the payments are increased.
This arrangement came about after the old pension funds ran into enormous actuarial deficits by promising high returns they couldn't possibly achieve. They were also managed corruptly, with the shenanigans ending at the beginning of the last decade when Benjamin Netanyahu, the finance minister at the time, undertook a wide-ranging pension reform that reduced members' rights and raised the management fees collected by the funds.
But Netanyahu back then never dared encroach on the pension industry’s nature preserve, namely the defined benefit pensions plans enjoyed by civil servants, police, teachers and the defense establishment. The universities and local government also enjoy defined benefit plans. Here the employee doesn't set aside any savings, while the state promises him a pension of 2% for every year of employment. On reaching retirement, he receives a monthly allowance based on his final paycheck, which goes without saying is almost always the highest of his or her career.
The government's liability for defined benefit pensions reaches around NIS 600 billion and this mountain is continually growing. And if this isn't enough, it doesn't behave and isn't managed like the defined contribution pension market in any way. When defined contribution pensions face a deficit, it is the beneficiaries who pay. When the state budget goes into deficit — for one, because of promising state employees excessive pension rights — it's the taxpayer who bears the burden.
So now that a need has arisen to adjust defined contribution plans for good reason — low interest rates — has anyone considered also adjusting the defined benefit pensions? That would be going too far. This is already out of Sarig's reach and we need to go back to the budget department. But that department's officials don't give a hoot that low interest rates are decimating the public's pension portfolios. Their only responsibility is to charge the public the high, wanton price of promising pension rights detached from changing market conditions to state employees.
Is Lapid ready to dive into this muddy pond? The real question is whether he is the shining knight of the middle classes ready to learn about the differences between people with defined contribution pensions who get screwed over and over, and the defined benefit pension barons who are totally cut off from the deep freeze of low interest rates and chopped pension payments? The public needs to know whether he will he demonstrate leadership and foster real social justice in the pension market.
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