Ministry of Finance Reforms: Public Benefit or Budgetary Strategy?

The Ministry of Finance is actively preparing for the next Arrangements Law, with a series of measures in various stages of development. One of them is the unified investment account reform, which is supposedly intended to incentivize the transfer of funds from current accounts to interest-bearing channels and to distribute tax benefits more correctly. The second is a fundamental pension reform, under which contributions from wages to savings would be reduced in exchange for an increase in net pay.

The official justification is the individual's freedom to manage their money and stimulate consumption, which would have a multiplier effect on GDP. However, signs indicate that this is only part of the reason, as the moves are also intended to increase state revenues.

Weak workers will be hurt, strong ones will manage

The first result of reducing mandatory contribution rates could be a blow to workers earning less than the average wage. While reducing contributions will increase net pay, due to "present bias," it is likely that the money will be directed toward current consumption. This reduction carries a heavy price: increased reliance on state allowances in retirement.

In contrast, high earners will be able to invest available money in real estate or the capital market, channels from which the state derives tax revenue. It is notable that this initiative comes from professional echelons, whereas such reforms are typically characteristic of political moves aimed at presenting popular achievements.

Old-age allowances were eroded even earlier

It is important to remember that the pension system in Israel relies on three layers: government allowances, pension savings, and private savings. In 2004, the government dramatically reduced the first layer by linking old-age allowances to the average wage rather than the Consumer Price Index, leading to a real erosion of benefits. Now, tax benefits for pension savings, which cost the state over 30 billion shekels annually, are in the crosshairs of the Ministry of Finance.

The mine hidden in the investment reform

The third component concerns private savings. As part of the "arbitrage reform," it was decided to extend tax exemptions to mutual funds and savings policies, but to limit the exemption ceiling for deposits to 200,000 shekels. The Ministry of Finance insists this is a fiscal balance move, but canceling tax deferrals for amounts exceeding the limit will bring money into the state treasury. The regulator, the Capital Market Authority, opposes the move, believing the reform will increase costs for savers.

Other ways to increase net pay

While canceling benefits in the arbitrage reform will mainly affect capital owners, cutting pension contributions will hit the weaker strata and the young middle class first. Net pay can be increased through real measures: addressing the cost of living, fostering competition, and improving public services. It would be appropriate for the Ministry of Finance to establish a "special team" to address these systemic issues as well.