Ministry of Finance Considers Cutting Pension Contributions to Close Budget Gap

A team established by the Ministry of Finance to examine tax benefits in pension instruments is considering recommending a reduction in pension contribution rates. While this move would increase employees' net salaries in the short term, it is expected to harm long-term savings and endanger the financial security of Israel's aging population.

This initiative comes shortly before 2028, when the tax exemption rate on pensions is scheduled to rise to 67% (currently 57.5%).

Simultaneously, the Ministry of Finance is drafting the Arrangements Law for the next state budget. The ministry sees a political opportunity to implement reforms to close the budget hole created by the war. Reducing contributions would save the state billions in tax benefits and increase tax revenues from private consumption.

Evolution of Pension Obligations

Over the last three decades, significant reforms have been implemented. Following the 1995 actuarial crisis, old pension funds were closed to new members. In 2004, the public sector shifted to accumulative pensions, and in 2008, mandatory pensions were introduced. By 2017, the contribution rate reached 12.5% (6% employee, 6.5% employer). According to the Bank of Israel, these reforms contributed about 0.7% of GDP to household savings between 2006 and 2019.

Potential Reduction of Benefits

The state currently grants income tax exemptions on monthly pensions. In 2024, the Ministry of Finance estimated that freezing the planned increase in these exemptions saves the treasury about 400 million shekels annually. Currently, the state foregoes nearly 31 billion shekels in tax revenue due to various pension-related tax benefits.

Ministry sources argue that increasing workers' net income stimulates private consumption and economic growth. Another perspective emphasizes reducing paternalism, allowing individuals to choose how to invest their money, whether in capital markets, real estate, or private consumption.

"A Mistake That Is Hard to Fix"

Dr. Alex Kaplun, an expert on retirement economics, warns of the consequences: "Reducing contributions could be a disaster for generations that will have to fix it in 30 years. We are in a period of uncertainty with climbing life expectancy, and reducing savings is an irresponsible step."

He suggests that reversing the current model is a huge mistake. He notes that easing contributions might only be viable for those aged 60 and over, as a shekel deposited at age 30 generates significantly more capital through compound interest than one deposited at age 60.

Eroding Old-Age Pensions

Old-age pensions from the National Insurance have been eroding since 2004, as they are linked to the average wage rather than the Consumer Price Index. Furthermore, the Ministry of Finance aims to limit tax benefits on private savings, proposing a 200,000-shekel ceiling on the capital gains tax exemption for investment pension funds (Kupat Gemel Le-Hashkaa) after retirement.

With life expectancy rising by 16% over the last 50 years and the elderly population expected to reach 15% within 25 years, the State Comptroller has highlighted the government's failure to prepare strategically for geriatric care. Reducing pension contributions could particularly harm weaker socioeconomic strata, especially amid uncertainty regarding the future stability of the National Insurance.