Taking Stock / Real Reform, for a Change

The finance minister, his top officials and senior bureaucrats in the ministry's capital markets division have been leading an aggressive campaign in the last few months, bordering on misinformation and demagogy, in an effort to pass the pension funds reform. They inflated the actuarial deficit, created an artificial emergency surrounding the funds, and sold the false claim that it was solely the Histadrut's failed management that caused the deficits.

It seems to have worked. On Friday, the Knesset Finance Committee passed the pension reform package, after 15 years of just talk. And the reform is very likely to pass in the Knesset too.

The ends do not justify the means, but the bottom line is that for the first time in years the treasury has succeeded in passing a long-term, structural reform in the economy. Even if the treasury used demagogy and exaggerated rhetoric to do it, the importance of the reform cannot be taken lightly.

You don't need to look for the reform's huge contribution in the capital markets, the budget or the appointment of professional management. The true message is in the act of reform, and not in the goal of eliminating the pension funds' deficits.

On the eve of the reform, everything seemed all right: the pensioners had rights, the retirement age was 65, and the designated bonds guaranteed solid, high yields.

But these facts were nothing but an illusion. The actuarial deficit guaranteed that one day the money would run out; the retirement age was a bluff because it is impossible to keep to it; and the solid investments in government bonds were nothing but a bad way to subsidize the funds. There was no way to promise true peace of mind, since the funds still had enormous deficits.

The pension reforms, which will eliminate these deficits, announce a new message that has been missing in the last few years: The government has stopped hiding its head in the sand, has acknowledged how bad the situation really is, and is now formulating a long-term recovery plan. This message is critical not just to the pension fund members, but to the entire country.

The so-called harm embodied in the reform is a fiction, because the danger has long existed in the form of the deficits. Everyone knew that one day it would be necessary to worsen pension terms to pay off the huge debts. The only difference is that today we recognize the situation and are trying to do something about it.

There is also a clear contribution to the capital markets. The reduction of the designated government bonds to 30 percent of the funds assets will gradually free most of the funds' resources to the markets, and bring greater liquidity and a deepening of the market's base. It will also advance the bond markets, a no less important arena than the stock market.

The appointment of professional mangers will bring the end the tradition of political hacks and Histadrut cronies running the funds. We can only hope that their replacements will be professionals without political connections to the finance minister or the treasury.

But the change in the funds' investment policies also carries a threat: a return to the affair of the provident funds' investments in the stock market in 1992-3.

At the end of the 1980s, provident fund managers were sent out to the markets in exactly the same way pension fund mangers are today. Some of them chose to exploit this freedom and the rising tide in the stock market to use their customer's money to enrich themselves personally. They bought garbage stock at top prices, closed small bribery deals in IPOs, manipulated stock and bond prices, and felt like kings with all the business sector's interested parties toadying up to them. Some were caught and convicted, but most got away scot-free.

Now the treasury needs to massively reform the pension funds' management, reporting and transparency that are essential in order to ensure that the funds will not be the next suckers of the market; those who buy the stocks and bonds of the tycoons and interests that the banks are not willing to finance.

But we have forgotten the most important thing: the big lie they're telling us now is that the reform will free up NIS 100 billion from the funds for the private sector. We have to remind ourselves over and over again that this has no basis in reality. The only way to funnel funds to the business sector is to reduce the issuance of government bonds, in other words to reduce the deficit.

But as to the deficit, it seems that Netanyahu is following in his predecessor Silvan Shalom's footsteps at this stage. The estimated deficit for 2003 is 5 percent of GDP, if not more, and the treasury has yet to explain to us how they are planning on reducing it.