Last week witnessed a fleeting ripple of concern among Israeli citizens about
their pensions. A report surfaced that the Treasury was about to instruct the
pension funds to reduce the rate of expected return on their assets. In plainer
English, this means that the pension funds would calculate the future value of
their assets on the basis of an annual rate of increase of x%, instead of y% as
had been done hitherto – where x is LESS than y.
Even people with very
limited understanding of mathematics and finance will grasp that if something
grows at 2 percent a year for five, 10 or 20 years, it will end up being worth
less than if it had grown at 4% a year. In this case, the “something” being
referred to is pensions, the largest financial asset that most people possess
and the one they “rely on to see them through their old age,” as the standard
cliche has it.
It is therefore quite understandable that this report
triggered concern among the relatively few people who were in the country and
still following the news in mid-August. However, the story faded after a few
days, following a reassuring statement from the Treasury. But it actually
doesn’t make a jot of difference what the Treasury said by way of reassurance,
as will be explained shortly.
What fascinated me was that the reaction to
the initial report, among most of the media and hence most (of the relatively
few) people who heard about it, was to view the whole subject as being a
Indeed, it was presented as “another attack on
citizen’s pensions” on the part of the Treasury, for some nefarious goal that
was not spelled out but left to the fertile imagination of the
reader/listener/viewer. Given that perception on the part of the public, it’s
not surprising that the denial of any such intent or plan made people feel
better, although their suspicions probably remained.
The reality – the
very grim reality – is this: The Treasury, of Israel or any other country, does
not have the ability to determine how large people’s pensions will be in the
relatively distant future when they retire.
Treasury officials, along
with all other mortals, have not the faintest idea what the rate of return on
investments will be over the medium to long term.
What the report
suggested was that the Finance Ministry department responsible for oversight of
the pension and insurance sectors was catching up with historical facts.
Specifically, it is belatedly coming to grips with the sad but true fact that
the rate of return offered on new investments in the fixed-income area (bonds
and loans) has been very low in recent years.
That historical reality has
already undermined the imputed value of pensions – because these continue to be
calculated on the assumption that the rate of return will be y%, when it has
already dropped to x%. Some damage has already been done, and the longer the
markets continue to provide low returns, the more damage will
The implication of this reality for the average pension saver
is unpleasant, and in some cases unpalatable: The estimated value of your
pension assets, and hence the estimated amount that your pension fund says it
will pay you per month when you retire, IS WRONG. To be more precise, it is TOO
That is because these numbers have been based on an unrealistic
assumption of how much your pension assets will earn, which does not take into
account what has happened to pension savings these past seven years – first
during the crash of 2007-09 and then during the era of low interest
The pension funds should come clean about what is happening, and
the Treasury should force them to do so. But if the entire apparatus – pension
funds, regulators, employees and employers who save in the funds – continues to
bury its head in the sand, the damage will continue to mount up and the eventual
shock will be much greater.
The good news, such as it is, is that Israeli
pension savers are less badly hit than most others, and they are less vulnerable
going forward. There are many reasons for that, but as of now, that statement is
a valid generalization.
American pensions are in a very sad state, but
American savers have woken up to the world in which they live, rather than the
one they dreamed of – which is why the only demographic group that has seen
persistently rising rates of employment over the last five years is the 55-64
age group. It is high time for Israeli pension savers, of all age groups, to
wake up to the challenges facing them and to adjust their expectations and plans
to current realities.