NII’s insurance, social-policy goals don’t always harmonize

A recent conflict in the Knesset is instructive, because the provisions of the proposed reform involves both fiscal and welfare elements.

This year’s Adjustments Law has been accompanied by many interesting and positive developments. The Adjustments Law is a peculiar Israeli ritual; after the executive branch proposes a budget and the legislative branch exercises its right of oversight, by examining it and deciding what to approve, at the last minute a special “adjustments bill” is proposed, containing hundreds of significant changes to the budget, proposed in many cases not by the government as a whole but by the Treasury, presented to the Knesset as a take-it-or-leave-it package deal – and with a time frame too short for lawmakers to realistically read, understand and criticize it.
This year’s Adjustments Law has been greatly reduced, but the scope for meaningful Knesset oversight is correspondingly greater.
One proposal in the new law is to significantly raise the level of income that is subject to National Insurance Institute payments – without a commensurate rise in the amount of benefits. As the NII points out, the proposal is influenced by three related yet distinct and sometimes conflicting aspects: On the one hand NII payments are meant to be insurance, in which families pay a monthly premium and in return are entitled to insurance in the case of misfortune.
But the NII is also conceived as an agent of social policy, and many social programs meant to aid the needy are administered by the NII and not by any government ministry.
Finally, NII is a fiscal program that eats up a very large fraction of taxes and pays out huge sums in benefits, and like any fiscal program, it needs to be kept solvent.
From an insurance point of view, you want to have a correspondence between the amount you give and the amount you get. If more income is subject to the tax (higher premiums) then recipients should be covered for a higher level of income (higher insurance benefits). Insurance is not meant to help the unfortunate at the expense of the fortunate, but rather to help a given person at a time of misfortune.
But the insurance aspect of “national insurance” starkly contradicts the “social policy” aspect. An equity-oriented tax system should be progressive, yet the ceiling on subject payments makes NII payments a highly regressive tax: payments are a fixed fraction of income up to the ceiling; then they become a continually declining fraction of income.
From a fiscal point of view, the NII ultimately has to finance it outlays. If it wants to maintain an “insurance” orientation, it will not have money to pay for “social policy” programs; decoupling the payment and benefits is one way of ensuring the NII’s fiscal independence.
The NII opposes the change in the law; it says the social-policy aspects of its mandate should be financed from general tax revenues; i.e., from the Treasury.
“It is wrong to involve the National Insurance Law with legislation whose object is solely fiscal, and whose considerations are tax oriented,” the NII said.
”The national insurance system is not part of the general fiscal mechanism, and certainly the NII should not be viewed as an agent of tax collection. Legislation that views the NII as a unit of the Treasury is unacceptable.”
The principle of insulating national insurance from general fiscal policy is a sound one; the need for independence is the very reason that the NII in Israel, and the Social Security Administrations in most countries, are established as independent, self-financing entities distinct from the Treasury.
But there is a certain internal tension in the NII’s claim; if the NII is to be independent of the Treasury and not party to fiscal considerations, it should also not be accepting Treasury financing for its programs.
The proposed reform would strengthen the essential independence of the NII. It would make the NII tax more progressive but the tax system as a whole more regressive, because the new tax is still a regressive one.
A conflict arose between the Knesset Finance Committee and the Knesset Labor and Welfare Committee regarding who is responsible for discussing the NII reform in the Adjustments Law. The conflict is instructive, because the provisions of the proposed reform involves both fiscal and welfare elements.
Asher Meir is research director at the Business Ethics Center of Jerusalem, an independent institute in the Jerusalem College of Technology (Machon Lev).