Analysis

As Israelis Live Longer, State Faces Struggle to Pay Retirement Benefits

Latest report by accountant general shows sharp deterioration in National Insurance Institute’s finances going forward, even as treasury aid is due to rise

Elderly people with their caregivers in the central Israel city of Ramat Gan, May 2017.
Eyal Toueg

The annual report of the Israeli government, released on Monday, pointed to any number of positive developments in the budget, such as a drop in interest costs Israel paid on its debt over the last few years, an increase in civilian spending and a relatively modest fiscal deficit in 2016.

But all of this was overshadowed by the worrying deterioration in the finances of the National Insurance Institute.

The NII, which is responsible for paying out age, disability and unemployment benefits, has been known for some time to face serious financial problems. But as the treasury’s account general revealed on Monday, the problems are now much bigger – and that’s because Israelis are living longer.

Ballooning budget Treasury payments to the
National Insurance Institute, NIS billions

The latest estimates conducted by the NII together with the Finance Ministry, which take into account the allowances it is obligated by law to pay and adjust for lengthening life spans and an aging population, show a dire situation.

To help cover the NII’s payment obligations and its growing deficit, the treasury will have to give it far more money than it was forecast to even as recently as a year ago.

By 2030, those payments – which come on top of the income Israelis pay it directly – will come to 35.4 billion shekels ($9.8 billion at current exchange rates) annually. It will also have to give the NII another 12.3 billion shekels to cover its deficit, according to the latest estimates.

The effects of the updated actuarial tables already made themselves felt in 2016: Spending on retirement allowances provided by the NII jumped to 104 billion shekels, from 42 billion. All told, spending on allowances and transfers soared 37% to 308 billion shekels, according to the accountant general.

The reason for the sudden surge is updated actuarial tables the NII prepared last year. But the problem didn’t end with the extra allocations in 2016. As Israel’s populations ages, the share the NII spends on old-age allowances will grow to 43.5% of its budget in 2045 from 39.5% in 2014. Nursing care subsidies will nearly double to 14.5% from 7.3%.

The treasury now sees itself having to double its annual contribution to the NII over the two decades from 2014 – from 19 billion shekels to 39 billion in 2035. But even that enlarged figure won’t cover what the accountant general sees as a 30 billion shekel deficit for the NII that year.

In 2026, the NII is forecast to move into a permanent deficit – that is, it will be paying out more money than it is taking in from all sources. By 2042, it will have emptied out all the money it has in a reserve fund and will no longer be able to meet its obligations to Israeli citizens, the account general forecasts.

Although the latest estimates are more severe than earlier ones, the general trend has been known to officials for some time. A government commission made recommendations in 2012, which were largely ignored except for some small changes in the 2016-17 Economic Arrangements Bill, which adjusted treasury payments to the NII.

Meanwhile, a proposal to gradually lift the retirement age for women to 64 from 62 in order to save pension costs was delayed again last year after Finance Minister Moshe Kahlon declined to fight for the change in the Knesset.

On the positive side, Israel’s underspending for non-defense items saw some improvement in recent years. Civilian spending climbed 37% in the six years to 2016, the accountant general said. Education budgets climbed 41% and welfare budgets by 46%. By the end of 2016, spending by civilian ministries accounted for 18.4% of gross domestic product, up from 17.6% at the end of 2015.

Military spending as a percentage of GDP was in decline, from 22.6% of all government spending in 2010 to 20.2% in the middle of 2014. Operation Protective Edge in 2014 saw the percentage climb again, to as much as 21.6%., but today it is 20.4% – almost back down to its pre-conflict level.