Employers Off the Hook / The Trajtenberg Reforms That Vanished

Why push through the plan just to ensure that the NII would have money to pay pensions in the future? The future is far away. Apparently the NII will be waiting a long time for salvation.

Last week, the cabinet celebrated its decision to pass the first chunk of Trajtenberg reforms - the recommendations that Prof. Manuel Trajtenberg's committee for social and economic change drafted regarding tax policy. Yet in its celebratory mood, it forgot to mention that two clauses hadn't passed. Surprisingly - or not - both measures relate to the country's largest employers.

One clause, which called for dropping import duties, will be carried out over a longer time frame. The second clause, however, vanished entirely, despite Prime Minister Benjamin Netanyahu's promise to Trajtenberg that he would pass his committee's recommendations in full.

Emil Salman

This clause dealt with increasing employers' contribution to National Insurance payments. Currently, employers withhold 7% of workers' salaries for these payments, and contribute another 5.9% at their own expense. Thus, payments equal 12.9% of each worker's salary. The Trajtenberg committee recommended increasing employers' contributions for employees who earn less than minimum wage (60% of the average wage ) to 7.5%. Thus, for these workers, payments would equal 13.5%, increasing collection by NIS 2.5 billion a year and helping ensure the National Insurance Institute would be financially sound.

The Trajtenberg committee explained the importance of ensuring the NII could pay pensions, particularly for the elderly and nursing care patients, and reducing its dependence on the national budget and the state of the economy. It also noted that Israel's employers pay very low contributions. In most countries, employers contribute more than employees, not to mention the fact that in many countries, the employer, not the employee, pays for health care.

In Israel, by comparison, not only have employers managed to save themselves the expense of health care, they also pay less National Insurance than their employees do. Earlier this year, the State Revenue Division compared the tax burden in Israel to that in OECD countries and found major discrepancies. The largest one involved employers' National Insurance payments. On average, payments by OECD employers equalled 5% of GDP. In Europe, they equalled 7.1% of GDP. In Israel, however, they were only 1.4%.

Long before the social welfare protests and the Trajtenberg committee, the Finance Ministry sought to fix this. After employers' taxes were cut to the current level back in 2004, the NII lost NIS 12 billion in income. Now seemed like a great time to fix it.

Pressure from industrialists - led by Manufacturers Association of Israel head Shraga Brosh - led to this plan being dropped, of course. Brosh told Netanyahu, Finance Minister Yuval Steinitz and others that it wasn't wise to take NIS 2.5 billion from employers amid a global financial crisis, and that doing so would lead to layoffs. He also argued that the cost would be passed on to consumers, particularly by government monopolies such as the electricity and water utilities. That last argument is particularly interesting because, in a competitive market, businesses should not be able to raise prices simply because their costs increased.

Brosh's final argument won over Netanyahu: What's the point in shaking employers now just in order to avoid an actuary debt in the future? The actuary debt can wait for rosier times.

Apparently it was easy to convince Netanyahu. Increasing National Insurance payments clearly would not bring the government immediate public appreciation. Why push through the plan just to ensure that the NII would have money to pay pensions in the future? The future is far away. Apparently the NII will be waiting a long time for salvation.