Treasury Officials Mull Pension Cuts to Bring 2015 Budget Into Line

But finance minister is loath to be seen as hurting the middle class.

Moti Bassok
Moti Bassok
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Finance Minister Yair Lapid.
Finance Minister Yair Lapid.Credit: Olivier Fitoussi
Moti Bassok
Moti Bassok

The Finance Ministry is considering reducing pension payments from the state budget to army veterans and the civil service as it seeks to cut spending in 2015, TheMarker has learned.

But such moves are likely to face opposition from Finance Minister Yair Lapid, as a blow to his middle-class supporters. For now, treasury officials are not prepared to discuss the possible changes in more detail.

Reports of the review comes as treasury officials grapple with what they say is an 11-billion-shekel ($3.1 billion) gap between what budget rules say they can spend and forecasted revenues next year. The Bank of Israel says the gap is actually 18 billion shekels.

The budget deficit for 2014 is set at 3% of gross domestic product, and by law the deficit for 2015 is capped at 2.5%. Each half percentage point of deficit spending is equal to about 5.5 billion shekels, officials said.

Lapid is also talking about leaving the deficit target at 3% next year, while ministry officials are prepared to talk about a 2.75% deficit. Even the less ambitious target would mean big cuts.

Treasury officials say Lapid, determined not to raise taxes as he did last year, earning the public’s wrath, and has instructed them to seek spending cuts instead. Having already made big cuts for the 2013-14 budget, the treasury will be hard-pressed to find targets for additional cuts.

The pension cutback would hit the security establishment hardest, including not only retirees from the army and the Defense Ministry, but also from the Mossad, the Shin Bet, the Israel Police and the Israel Prison Service. They are the only government agencies that still have a significant number of so-called budgetary pensions, or defined-benefit pensions, rather than cumulative pensions.

When Prime Minister Benjamin Netanyahu was finance minister in 2003, he reduced monthly retirement pensions by up to 30%. He also introduced measures such as raising the age of pension eligibility two years, to as much as 67.

But that reform was not applied to state employees with budgetary pensions, reportedly because senior civil servants opposed it. Treasury officials said this week that the time had come to fix that, although they are not sure that Lapid and other elected officials will agree.

Budgetary pensions are a major cost item, reaching 18.7 billion shekels in 2012 and an estimated 20.1 billion shekels last year. According to actuarial tables, this cost will peak at 26 billion shekels in 2035 before declining.

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