Mandatory Pension in Israel: Impacts on Old-age Risks and Inequality

Van Leer Institute Press
Year of Publication: 

This policy study relied on our ability to obtain unique data bases related to the 2008 order that installed mandatory pensions. The data were analyzed with Mincer-equation regressions, which examine the influence of human capital on wage income and on the probability of being insured in the absence of a mandatory pension order. We also analyzed the data with a full actuarial simulator that we built with the help of the actuarial department of a large pension fund in Israel.

The simulator enabled us to examine the sensitivity of a funded pension to the parameters of the accumulation—life expectancy, management fees, the return on the principle, the percentage of the wage income that is pensionable, and the average number of months worked per year. A full version of the simulator was run on the data of a unique sample of a large pension fund and a significant variance was found in the parameters. These findings are of importance for both policy and research, because with the DC method the main risk falls on the insured. The data also enable us to examine the influence of mandatory pension coverage starting in 2008. As anticipated, the population that started receiving pension coverage at that time was a population that was weaker socioeconomically, and therefore mandatory pension has progressive effects on the income at retirement age.

Whereas the parameter of management fees receives media and regulatory attention, the percentage of coverage and the steadiness of work are barely discussed. In this study we showed that these two variables affect not only the mean rate of replacement, but also its variance—inequality. Weak populations usually work fewer months per year, and thus their percentage of coverage may be lower than that of stronger populations. In other words, not only does the pension system perpetuate the inequality during the period of employment, it even increases it.

We present the influence of the parameters on accumulation by means of a partial, simple simulator that is transparent to the user, and the results are similar to those from the sample analyzed with the full simulation. It is worth noting that the long-term effect of the percent of return is high relative to the effect of the management fees. An increase of 1% in the return leads to an increase of about 20% in accumulation and, consequently, in the pension payment; the influence of the full amount of the management fees on accumulation is 0.5% of the accumulation—only about 10%, and the full management fees are 6% of the deductions, and therefore about 6% of the accumulation. Thus, the addition of a single percentage point to the return is worth more than the removal of all the management fees. In this study we show that increasing the pension coverage, in percentages, whether through the salary or through years of accumulation, can increase the pension by a substantial percentage. Perhaps this is the direction to which decision-makers in the government and the Knesset should turn their attention.


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