Israel’s teenagers will be able to look forward to a big chunk of money when they turn 18. Under a plan hammered out between Finance Minister Moshe Kahlon and the ultra-Orthodox parties this week, instead of an increase in monthly child allowances that the Haredi parties had been promised, the government will deposit a fixed amount of money in a personal savings account for children.
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Similar savings plans already exist in other countries. In Israel, Zionist Union leader Isaac Herzog proposed the idea in May, getting over 80 MKs to endorse his proposed legislation. The saving scheme has long-term advantages both on a personal level and for the entire economy, helping young people as they start out in life and helping narrow income gaps in the next generation.
The details have yet to be worked out, and the plan itself won’t get underway for another 18 months. But a lot of the elements can already be explained. TheMarker answers some of the basic questions that parents are asking.
How does the plan work?
The government will open a personal savings plan for every child at birth, depositing 50 shekels ($13.20) every month until he or she turns 18. That will add up to 10,800 shekels – more with the addition of the estimated 4% interest annually (minus management fees). However, the final amount is subject to change.
How will the savings be paid out?
The savings are designated for basic needs such as tuition for higher education or job training, or to establish a business – not for trips abroad, a used car, or other things the typical 18-year-old might be tempted to spend it on. Because 18 is draft age for many young Israelis, the law will need to determine whether they will have the option of leaving the account closed until a later date, even if the government stops depositing funds. It’s a similar process to the grant young people get from the army after their mandatory service, so lessons can be drawn from the latter experience.
Why 50 shekels?
Mainly because it’s a round number, but also because it’s not too small for significant savings and not so big it could become a burden on the state budget.
How will legislation now move forward?
A clause will be added to the Economic Arrangements Bill outlining the plan’s principles, but not its details. A team will be set up, including all those with the expertise – the accountant general, budget division and National Insurance Institute – to formulate the exact wording of the law. The team will probably use the legislation the community-empowerment group Yedid prepared for Herzog, in order to shorten the process.
When will the savings plan become effective?
The savings plan is expected to begin with children born in 2017.
And what if your parents time it badly and you’re born in 2016?
In that case, 50 shekels will be set aside each month for each child for that year, which will be transferred to a savings account to be set up incrementally and retroactively, so they won’t fall between the cracks.
Who’ll manage the savings accounts, and what rate of interest will they carry?
After the legislation is passed, the Finance Ministry will issue a tender among financial institutions. Competition for the project should require a minimal interest rate to protect it from speculators. The savings plan will be closed until age 18, registered in the child’s name and exempt from liens on the parents.
What are the risks?
At this stage, all parties involved in promoting the plan are very committed to it. And because it takes care of so many problems and is long term, it’s hard to find opponents. Still, there have been many justified legislative initiatives in the past that were halted by political considerations.
How much will the plan cost the state budget?
Israel counts some 2.7 million children 18 and under. If 600 shekels a year is deposited for each of them, it will cost the government 1.62 billion shekels annually.
So, what’s the advantage for the government over just paying a bigger child allowance?
The 1.62 billion shekels enables Kahlon to adhere to the financial commitments made to the Haredi parties as part of the coalition agreement, while at the same time creating an effective solution for helping to reduce poverty and income gaps. It will not only help pay for further education or to start a business, but encourages savings instead of consumption.
Where are problems likely to pop up for the government?
In contrast to child allowances, which can be raised or lowered depending on government policy and fiscal pressures, few will dare touch such a program, because it is perceived as being particularly justified. On the other hand, it is a substantial budget item that the government is committed to indefinitely, which will give the treasury less budgetary flexibility.
Another problem stems from the long-term nature of the program. Kahlon agreed to the proposal on condition that child allowances wouldn’t be raised. But there’s no guarantee that demands to increase the allowances won’t emerge again in the future, or perhaps demands for the government to step up its support of the savings program. The savings plan creates two future tracks (allowances and savings) for increased spending, instead of one. Still, if lawmakers call for a hike in allowances sometime in the future, the treasury can always suggest increasing the monthly sum put into the child’s savings, which is an improvement over putting it in parents’ pockets.
What does the plan demand of parents?
Nothing. Depositing money into the account is mandatory for the government, though families can voluntarily top up the amount. It’s an advantage, but also the big disadvantage of the model as it’s currently presented.
What’s the disadvantage?
Under the treasury proposal, a family can decide if it wants to contribute the child allowance it gets to the savings plan. Families can also opt to add a monthly contribution to the plan, up to the amount of the child allowance. But, according to treasury estimates, only half of Israeli families will do so.
What’s the problem with families choosing not to add anything out of their own pocket?
The problem is the educational effect of savings is lost. According to Herzog’s original proposal, which was based on many studies from abroad – particularly on those by Prof. Michal Grinstein-Weiss and Dan Ariely – the model is not only about savings, but also for the benefit of educating young people about saving. A better, but more complex, model would require the government matching whatever the family deposits into the account, up to an amount set by law. The savings accumulate more quickly and the family is an integral part of the process. The amounts are small enough that a matching program would be limited to families with financial means.
The research by Grinstein-Weiss found that children who had matching savings plans opened for them when they were age 4 demonstrated a higher cognitive development than children in a control group. The reason is that their parents have more confidence that their children will have the financial resources to pursue higher education, and so invest more in them in other ways.
The feeling of pride regarding the ability to save also plays an important role in exiting the cycle of poverty. In any event, researchers recommend requiring parents to take financial education classes.
How will the government encourage families to participate in saving?
The child and family will receive a user-friendly report on the savings accumulated to date, which will contain a simulation explaining how adding money independently and on a regular basis, even in small amounts, is so important. Finance Ministry officials are weighing changes in the future that would require a contribution from the family.