Cents and Sensibility

Forget dangerous, it turns out a little financial knowledge is a horrible thing.

Guy Rolnik
Guy Rolnik
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Guy Rolnik
Guy Rolnik

Earlier this month, the Finance Ministry announced the establishment of a new unit, to teach the public about finances. It remains to be seen what the unit's goals will be, not to mention its strategy and tools. But unarguably, putting the issue of the public's financial know-how on the public agenda is a good thing.

The Israeli economy, like most economies around the world, has changed dramatically in the last 20 years and the dangers lurking for the financially ignorant have been multiplying. Handling investments, pension savings, insurance, mortgage loans, and even reading one's pay slip and managing the household budget, require a minimal level of financial understanding that most people don't have. Mistakes may cost dearly.

Thomas Gray Portrait by John Giles Eccardt, 1747-1748Credit: Courtesy of the National Portrait Gallery, London

Yet the government and people alike need to realize that a financial education brings its own set of dangers. Some are likely to decide that British poet Thomas Gray had it right when he famously wrote, "Ignorance is bliss."

The basics of the course

Here are some of the things you will learn in the course of your financial education:

The press keeps warning that the management fees levied by provident and mutual funds over 30 or 40 years will eat up a third of your pension savings. By the end of your study course, you will have realized that the highest fees are charged by the avenues from which exit is practically impossible - first and foremost the so-called "executive insurance" plans (bituach minahalim ). Until you studied, you didn't know you were being robbed. Now you know. Happy?

Once you have completed your studies you will know that the highest management fees aren't the ones reported in the papers, or in the printouts you get at home. They're hidden costs and fees. Billions of shekels are looted year in and year out from the public companies in which you're invested through your savings plan, through inflated executive salaries, insider transactions, bondholders' haircuts and forced buybacks (when a controlling shareholder obtains a 95% holding in a company, he can force the rest of the shareholders to sell him their shares at the price he'd offered ).

The lecturers on finance will tell you that in the long run, stocks return more. Good story, that! It's backed by lots of finance theory, too. Some of the proponents of this theory have won Nobel Prizes. The snag is that it isn't so, at least not seen over the last 10 years. Seen over 30 years, bonds returned more. Do you feel this knowledge has helped you? No? Dear, dear. Keep reading.

As you delve into the subject matter you will learn about the wonders of "budgetary pensions," received by hundreds of thousands of Israelis. They don't have to save for their dotage. The state will pay their pensions in full. They are spared exposure to the ferocity of the free market, the vagaries of economic growth, not to mention management fees. You may begin to suspect that your pension is vulnerable to losses, and that when you actually need the money it won't be there, and that meanwhile there's a gang of people in Israel who are safe from the vicissitudes of life. They'll get theirs. You may not. You are a Class B pensioner.

As you peruse the pages you will discover the world of actuarial calculations, and how different types of pensions are calculated. You will discover that the pensions of career soldiers, Israel Electric Corporation workers and the other employees of monopolies are worth a lot more than yours, even though you thought you were a master of the free market. The more you learn about pensions and the labor market, the more you will grasp that while you piled up a few hundred thousand shekels, you were also piling up a few hundred thousand for these people - in dollars.

You have reached 45 or 50 and work in the exciting, dynamic world of high-tech. But a little thought will show that your employment package isn't that wonderful thing you thought it was. In fact, it's pretty awful. That is because your chances of getting kicked out from age 45 and up is very high. You do not have tenure or a secure pension on which you can rely.

As you reach the advanced courses in finance, you discover that comparing the heavy tax burden in Israel with heavy tax burdens in Scandinavia and some other European countries is ludicrous. That is because the "tax burden" itself is just a number. The question is what services you get for your tax, and the countries that levy tax through the nose turn out to provide much better services, from healthcare to education to housing to social security. You will need a very advanced course in finances and investigative accounting to truly discover where your tax shekels are going.

At the very start of your studies, you will learn a term: "Return on investment." Then you will grasp how truly absurd housing prices in Israel have become. You will find no economic logic in your purchase of a grimy four-room apartment in a dilapidated building in Petah Tikva for NIS 2 million, or in Tel Aviv for NIS 4 million (or in Ra'anana for NIS 5 million ). The only logic is to silence your nagging parents-in-law, who insisted that property prices will rise by another 100% in the next three years.

If you learn just how cruel the labor market is going to be in the next 10 years, at least as far as the private sector is concerned, you will wonder why you were so rash as to take out that lunatic million-plus-shekel mortgage just to buy that hideous apartment in that horrible neighborhood, since you don't work for a monopoly and your parents aren't about to leave you millions. I won't name names. You know what I mean.

Even before you wrap up that study course, you will understand why you should never take out any kind of consumer credit, mainly from people pushing it hard. You will understand that consumer credit leads you to buy things you don't need and destroys your ability to save.

The more you learn about finances, the better you will understand the caste system of the Israeli labor market. There is the uppermost 1% consisting of talented entrepreneurs, people who dared all and won, heirs and employees at the monopolies. The second caste is that of the "connected," who live off the fat of your land. They have tenure through to retirement, at 67 or earlier, and live well off their budgetary pensions that you pay. There is the caste of human detritus, the people who work through manpower agencies. And there is you. Who are you? You are the ones who didn't want to look hard at where you are going, and when you understand what your future holds in store for you, it may be too late.

But it isn't too late to start tackling Israel's problems, and not only through "financial education."

With a little financial education, you will realize that the protests of the summer of 2011 were just a taste of the protests to come - when you and all those others who took no interest in their financial future wake up, and understand just how the game in Israel is played.