Israel’s limited welfare policy and high dependence on private pensions has led to elderly poverty rates that are the highest in the developed world, according to a Taub Center for Social Policy Studies in Israel brief released on Wednesday.
Liora Bowers, director of policy at the Taub Center, examined the reasons for this phenomenon and attempted to discover why Israel’s elderly have the second-lowest poverty rates in terms of market income, but the highest poverty rates in terms of disposable income relative to the other Organization for Economic Cooperation and Development countries.
According to the brief, Israel has a relatively young population with only 9.9 percent over 65 years of age, relative to an average of 16.1% in 21 other developed OECD countries.
The report explains that the government issued an administrative order in 2008 mandating employment-based pensions for all salaried employees.
As of January 2014, at least 17.5% of a salary up to the average wage must be contributed, approximately two-thirds from the employer and the remainder from the employee.
As such, about half of the elderly received income from private pensions in 2011. However, due to differences in employment characteristics, such as employer type, occupation, contractual arrangement and years worked, there are large disparities in private pension ownership among the population. For example, private pensions of senior citizens account for only 13% and 7% of the gross incomes of Israeli- Arabs and Russian immigrants, respectively, compared to 36% for native Israelis, on average.
“The prevalence of private pensions and their relatively high payout during retirement contribute to Israel’s low market income poverty rate among the OECD,” it said.
However, the report states that Israel’s historical reliance on private pensions has been accompanied by relatively low governmental support. Israelis between 65-74 and 75+ receive about 31% and 48%, respectively, of their income from government transfers – a large amount in the form of old-age allowances.
Furthermore, the average Israeli male who enters the workforce today and earns the average wage throughout his life can expect his public pension income to equal only 22% of his average lifetime retirement (wage replacement rate), compared to nearly 50% in other OECD countries.
With regards to elderly income supplements, only 24% receive support, which includes the vast majority of older immigrants who rely extensively on it. Qualifying for income supplements is difficulty as it requires that one not own land, have little savings and meet strict rules limiting vehicle ownership.
As such, “Israel’s low old-age allowances and limited access to income supplements contribute to its relatively higher rates of disposable income poverty,” the report said.
Despite this, according to the report, future elderly in Israel will have higher relative income in retirement as compared to the future OECD elderly (assuming pension systems do not change), as the private pension system’s relatively high replacement rate is projected to more than offset the lower rate from public pensions.