Who Is Guarding Your Grandfather's Money?

A new financial institution has come into being here, an institution that holds long-term deposits for the public, for periods of 12-15 years and totaling some NIS 10 billion. This is a very special institution, for two reasons. First, the depositors in this institution are only pensioners; your grandparents are its customers, depositing an average of $200,000 of their retirement savings.

The second reason is that the institution is not recognized as a financial institution, and is effectively not recognized as an institution at all - it is not subject to any law and requires no licensing. No body supervises it - or the NIS 10 billion of your grandparents' retirement funds.

This institution is called protected housing. In Israel, there are a few hundred such institutions, which own about 10,000 housing units. Ilan Tamir, chairman of the Association of Assisted Living Facilities in Israel, estimates the number of residents of protected housing complexes at 13,000, or 2 percent of the Israeli population over the age of 65 - the 2 percent that is the most established. This is because protected housing, unlike the old age homes of yesteryear, is expensive luxury housing, intended for wealthy pensioners.

Unlike senior citizens homes, protected housing is not recognized by any governmental body. Senior citizens homes are anchored in the law and are supervised jointly by the Health and Welfare Ministries. Protected housing, on the other hand, is not recognized under the law, and is therefore totally unsupervised. Tamir justifies this reality, noting that senior citizens' homes are intended for seniors who are physically and often mentally frail, and require constant care - and the state dictates the standards for this care.

Protected housing, on the other hand, is designed for sprightly seniors, those who still feel young and strong and have chosen protected housing as a step up in their quality of life.

"Most of these people still drive a car," explains Tamir, "and can make their own decisions. There is no reason for them to be supervised, just as they are not supervised when they buy an apartment from a contractor."

Aside from the NIS 10 billion, protected housing is expensive. Very expensive. Every tenant in a protected housing complex pays the institution a one-time deposit of $150,000-$200,000, plus monthly maintenance fees of about $1,000 until they move out, usually after 12-15 years. During that period, the management company deducts 2.5 percent from the deposit each year, to a maximum of 30-37 percent, thus reducing the deposit by up to $75,000.

The pleasure of living in protected housing therefore costs about $5,000 a year for the deposit reduction, another $10,000 or so for lost interest income if the money had been deposited in a bank, plus $12,000 in management fees. This amounts to $27,000 a year, or about $2,250 per month - on average. Some complexes charge much more.

It is doubtful most of the people living in protected housing realize how expensive their accommodations are; it is doubtful if they realize the significance of their commitment to pay such sums every year; and it is doubtful whether they understand the financial risk to which they are exposed. This deposit is one of the most dangerous they will ever make, and is put in the hands of a private body that does not involve them in the management of that money, does not give them anything in return (the apartment is not registered in their name) and does not have to meet any commitment of stability.

As far as the Israeli economy is concerned, NIS 10 billion of public money is in a long-term deposit with private bodies that have no regulatory requirements. Surely these depositors, who are entering their sunset years and depositing the bulk of their retirement funds, deserve some government supervision of that money.

Thousands of billions of shekels of Israeli pensioners' money is deposited for 10 years or more in the hands of private bodies - earning no interest, without any guarantees, with no restrictions on the money's investment and with no state supervision. This money belongs to the approximately 13,000 pensioners who live in protected housing and represent about 2 percent of the senior population.

The residential towers of protected housing complexes rent units to older people until they die. Most of the money for a unit's lease is paid in advance,usually a 12-15 year deposit. The management companies of these complexes deduct 2.5 percent from that deposit annually, for a total of 30-40 percent of the sum, whose remainder will be returned to the tenant or his heirs when he vacates the unit. The normal deposit for a two-room unit is $200,000.

Not only is this money deposited for a very long time with no interest or guarantees - the depositor also receives nothing in return, as the housing unit is not registered in his name. Furthermore, unlike the banks, protected housing is not subject to state regulation or proof of financial stability - making protected housing companies one of the most dangerous financial institutions in Israel.