National Insurance: How Old-Age Pensions Are Calculated
A worker and their employer may transfer over a million shekels to the state throughout their career, but the National Insurance Institute distributes old-age pensions amounting to only a few thousand shekels. We explain how this mechanism works and why it is not a personal savings account.
After 50 years of work and payments to the National Insurance Institute (Bituach Leumi) and health insurance, many expect to receive a pension at retirement age that reflects the amounts transferred throughout their lives. However, in practice, the National Insurance Institute does not operate like a personal savings plan, and the old-age pension is not calculated according to the amount each person paid during their working years.
A worker who earned 10,000 shekels per month and a worker who earned 40,000 shekels per month may receive a similar basic old-age pension, even though the gap in the payments they made over the years may reach hundreds of thousands of shekels.
In 2026, the basic old-age pension for an individual stands at 1,838 shekels per month. At age 80, the pension increases to 1,941 shekels per month. A seniority supplement of 2% for each full year of insurance can be added to the basic amount, up to a ceiling of 50%. Someone who has accumulated at least 25 years of insurance qualifying for the maximum supplement can reach about 2,757 shekels per month, before deductions and other additions.
How much money does a worker pay over 50 years?
Let's take for example a worker who earned 15,000 shekels per month. According to 2026 rates, the worker pays about 1,217 shekels per month to the National Insurance Institute and health insurance, while the employer adds about 902 shekels per month.
In total, this is about 2,119 shekels per month transferred for that worker, which is about 25,400 shekels per year.
If we maintain the same real wage throughout 50 years of work, the worker will pay about 730,000 shekels out of pocket over the period. The employer will add about 541,000 additional shekels. Together, this is a cumulative amount of about 1.27 million shekels that will be transferred over the working years.
On the other hand, if that same person receives a pension with the maximum seniority supplement, in the amount of about 2,757 shekels per month in 2026 prices, for 20 years of retirement, the total amount they will receive will stand at about 662,000 shekels.
Apparently, it seems that the amount the worker will receive is significantly lower than the amount transferred for them over the years. However, such a comparison does not reflect the operating mechanism of the National Insurance Institute.
Some of the worker's and employer's payments are intended for health insurance and not just for the old-age pension. In addition, National Insurance contributions fund other rights such as unemployment, maternity, disability, work injury, long-term care, and survivor benefits.
Beyond that, the funds are not kept in the worker's personal account and are not invested for them privately. It is a pay-as-you-go mechanism, where current workers help fund the pensions paid today, and in the future, other workers will fund part of their pensions.
Therefore, it is not possible to treat National Insurance payments as personal savings that are returned to the worker with interest at retirement age.
The goal of the old-age pension is to ensure a basic safety net for those who meet the eligibility conditions and have accumulated an insurance period. It is not intended to maintain the standard of living the worker had during their working years.
As a result, high-income earners pay higher amounts over the years, but their pension does not increase accordingly in full. This is part of a redistribution mechanism, where high-income earners help fund services and benefits for the entire population.
For those who do not have sufficient income, there is an option to receive income support, subject to income and asset tests. In 2026, the total amount for an individual aged 70 to 80 can reach about 4,418 shekels per month.
The old-age pension is not intended to replace a salary. In Israel, there is a mandatory pension, to which the worker and employer deposit funds that are accumulated in the worker's name, invested over the years, and are supposed to be the main source of income after retirement.
Therefore, a correct examination of the worker's situation after retirement should include all sources of income, including the old-age pension and the pension savings accumulated over the working years.
Ultimately, even after 50 years of payment to the National Insurance Institute, the pension received does not constitute a direct refund of the amounts paid throughout the career. It is an insurance mechanism intended to provide a basic income in old age, while maintaining the standard of living depends mainly on the pension savings accumulated over the years.
