First Year of the Mandatory Pension Arrangement in Israel: Compliance with the Arrangement as an Indicator for Its Potential Implications for Labor Supply

Bank of Israel Discussion Paper No. 2011.05

33 Pages Posted: 19 Apr 2012

See all articles by Adi Brender

Adi Brender

Bank of Israel - Research Department

Date Written: May 1, 2011

Abstract

Since 2008, Israel is gradually implementing a universal mandatory pension arrangement. The arrangement is found to have had a significant effect: about half of the employees that did not contribute to a pension arrangement in 2007, and continued working in 2008, began to save. In comparison, only one sixth of those who did not save in 2006 began saving in 2007. Nevertheless, a significant part of the target group did not start saving, and this avoidance is found to be negatively correlated with the predicted desirability of pension savings for the employee. Key factors affecting the avoidance are: earnings below the income-tax threshold, a non-working spouse and being employed by a small employer. Most of those who began saving did so at the minimum mandated contribution rates, and the discretionary tendency to contribute above the minimum rate, is positively correlated with estimated pension desirability. This conduct indicates that a significant segment of the target group views mandatory pensions as a burden, and tries to avoid it; a behavior consistent with ex-ante calculations that show that it is indeed not beneficial for them. Further analysis shows that full implementation of the arrangement may result in a significant negative effect on the employment of low-income populations. Additionally, based on the existing legislation, tax revenue loss due to mandatory pensions far exceeds the future savings in means-tested old-age allowances.

Keywords: mandatory pensions, effective tax rate, welfare policy, tax wedge

JEL Classification: H55, J32, K31, J58

Suggested Citation

Brender, Adi, First Year of the Mandatory Pension Arrangement in Israel: Compliance with the Arrangement as an Indicator for Its Potential Implications for Labor Supply (May 1, 2011). Bank of Israel Discussion Paper No. 2011.05, Available at SSRN: https://ssrn.com/abstract=2042453 or http://dx.doi.org/10.2139/ssrn.2042453

Adi Brender (Contact Author)

Bank of Israel - Research Department ( email )

PO Box 780
Jerusalem 91007
Israel
+972 2 655 2618 (Phone)
+972 2 655 2657 (Fax)

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