A Reform in Tax Benefits for the Israeli Pension Market

This research aims to evaluate the efficacy of pension-related tax benefits in the presence of a legal obligation to make a pension provision, in terms of the expected poverty rates at retirement. A random sample of 350,000 salaried employees in Israel over six years (2009–14) was used to investigate the proportion of employees in the workforce who do not enjoy pension-related tax benefits. This figure was found to be 47 percent; all of the employees in the first through fourth income deciles and about 55 percent of those in the fifth decile do not enjoy those tax benefits. We also found that according to the existing pension provision and benefits systems, the income expected upon retirement will lead to a decline of three to four deciles, pushing many retirees below the poverty line. Based on our findings, we propose an alternative mechanism of tax benefits that would provide equal pension benefits to all employees in Israel, help increase the size of occupational pensions, and decrease poverty at retirement without increasing the national budget. The proposed benefit would not be given as tax savings but rather an increase in pension savings. That is, instead of decreasing the amount of tax currently owed, the benefit would be invested in a savings plan to be developed by the government, which would add to the individual’s pension savings.