When he agreed to become finance minister Yair Lapid might not have been aware of the state’s whopping pension liability to its civil servants − an astronomical NIS 560 billion at the end of 2011, or 1.6 times the entire annual state budget, and growing.
Actuarial debt as of the end of 2012, to be disclosed by the accountant-general in May, is expected to balloon to more than NIS 600 billion.
The state is thought to have paid out NIS 16.6 billion in pensions in 2011, 4.8% of the overall budget: NIS 14.6 billion directly to retirees and NIS 2 billion to shore up pension plans. But that’s not all: The government also pays out an undisclosed amount in monthly benefits to retired employees of government hospitals, local governments, universities and other institutions.
Defined-benefit pension payments − also known as budgetary pensions − for retired civil servants will rise significantly until 2036 before beginning to decline as new agreements start kicking in under the newer accrued-pension method that is gradually replacing the defined-benefit system.
In 2011 the actuarial liability rose by NIS 35.4 billion, from NIS 524.6 billion at the end of 2010, but this doesn’t tell the whole story. The government is also an active partner in the huge actuarial deficits accumulated by public bodies like government hospital that go unmentioned in official reporting.
The accountant-general’s office does not know the extent of these deficits or how much the government pays out to help cover them. The assistance is an unknown portion of the state’s ongoing allocations to these institutions, officials say.
The reason for the huge growth in defined-benefit pension liabilities is the increasing number of defense-establishment retirees as well as rising life expectancies. The treasury estimates that the cost of defense pensions rose by NIS 200 million a year since the start of the previous decade, from NIS 3 billion a year to its current NIS 4.5 billion.
The low retirement age for career officers, 45 years, is one contributing factor. Others include new wage agreements with higher benefits, a rise in the number of employees with academic degrees and job-title inflation that includes more generous pension benefits.
Israel is not alone in having a ballooning retiree population. Pension crises have emerged in places as far-flung as Greece, California and parts of Germany.
Former Finance Minister Yuval Steinitz noted in an interview with TheMarker that the entire Western world suffers huge national debts due to the actuarial accounting for budgetary pensions but that Israel is so far the only state to have rescinded this entitlement for its civil servants. International credit rating agencies have taken this into account in awarding Israel its sovereign credit rating, he noted.
Beginning with the 1985 economic stabilization program, Israel followed the global trend of shedding the relics of the welfare state. But the issue of pensions remains one of its most distinctive vestiges.
A fool’s paradise
The defined-benefit, or budgetary, pension is paid out of the employer’s operating budget after the worker retires. In the case of civil servants, the pension is paid from the state budget and nothing is taken out of wages.
In practice the budgetary pension is an enormous benefit for workers, and the contrast with accrued plans has only increased since 2003. Members don’t need to participate toward their accumulated pension rights and receive various benefits like a boost or two in pay grade upon retirement, inclusion of unused sick and vacation days in a special retirement bonus and an option to take early retirement.
Accrued pensions, on the other hand, are used in the private sector: A certain percentage of wages is set aside monthly by both the employer and the employee. Retiree then receive a benefit from the amount saved up on their behalf.
The actuarial deficit for both tracks − the government’s budgetary pension and the accrued pension plans of the Histadrut labor federation − reached alarming levels in the 1990s.
In response the government embarked on a reform of the system in 1995 that among other elements barred the Histadrut pension funds from accepting new members. In 2001 the budgetary pension fund was closed to newly hired civil servants. New pension funds and other long-term saving vehicles were launched, but with less generous terms.
At the end of 2001 the eight older accrued-pension plans, mostly belonging to the Histadrut, had accumulated NIS 129 billion to NIS 137 billion in deficits. By the time the reform was completed, three years later, the worst actuarial problems had been solved. The entire public sector moved over to accrued pension plans and the eight troubled accrual plans were nationalized and combined under one roof called Amitim.
The state guaranteed the funds a safety cushion on their future payments, which in 2008 encompassed 200,000 retirees and 200,000 active workers. Thus each year the government hands the funds billions of shekels − some NIS 17.7 billion from 2003 to 2010, NIS 10.7 billion from 2011 until 2016 and some NIS 68 billion after 2017. Meanwhile, hundreds of thousands of retirees with these old funds have been paying a high, 1.75%, management fee since 2007 on their annual pension checks to help cover the actuarial deficits.