How can Israel create an economy fit for an aging population?

As societal aging and workplace automation threaten economies worldwide, Israel seeks to take initiative

Elderly Israelis sit in a designated protected space in a senior citizens home in Jerusalem, June 2, 2009, as a siren is sounded during a nationwide civil defense drill simulating a rocket attack.  (photo credit: REUTERS)
Elderly Israelis sit in a designated protected space in a senior citizens home in Jerusalem, June 2, 2009, as a siren is sounded during a nationwide civil defense drill simulating a rocket attack.
(photo credit: REUTERS)
The “twin threats” of societal aging and workplace automation pose major challenges to both Israel and economies the world over.
An aging population caused by trends of rising life expectancy – predicted to increase to 84.4 years among Israelis by 2040 – and declining birth rates are leading to what has been described as a pensions time bomb, requiring the dedication of unprecedented resources to supporting the retired and elderly.
In addition, tasks associated with older workers are also the most vulnerable to being replaced by intelligent workplace automation technologies, leaving individuals out of work earlier than expected.
A new report by the Israel Democracy Institute (IDI) aims to advance policies for the integration and retention of Israeli employees above the age of 50 in the workplace. While the overall participation rate in Israel’s labor force (80.2%) surpasses the OECD average, significant disparities are identified between age groups.
The labor participation rate stands at 85% among 35-44 year olds, but slumps to just 69% among 55-64 year olds and only 16% above the age of 65. In light of current trends, the report’s authors emphasize that significant reforms are required in the labor market.
“It is quite clear that there is a real problem where individuals who were fully employed in their late forties find themselves out of work later, and then struggle to find new jobs,” Prof. Yotam Margalit, who co-authored the report with Gabriel Gordon and Yarden Kedar,
told The Jerusalem Post.
“Currently, the overwhelming emphasis is on trying to assist workers that have lost their jobs and have become unemployed. There needs to be more attention to adding proactive programs that will also help workers retrain and upskill while still employed, with the idea that those individuals will either be more attractive to their current employers or to allow them to have more options outside their current place of work, so they’re better able to find better alternatives.”
Margalit, a senior fellow at IDI and associate professor at Tel Aviv University, will present the report’s findings and some recommendations on Wednesday at the IDI’s two-day Eli Hurvitz Conference on Economy and Society. The research is based on almost two years of working group discussions, bringing together representatives of government ministries and organizations representing both employers and workers.
“If we are able to increase the number of those individuals that are employed in their early fifties and are able to keep them longer in their jobs, that would be a much better investment than only focusing on those unemployed,” said Margalit, adding that all stakeholders have shown significant desire to implement successful reforms.
“Israel is not unique in this problem but, because it’s a problem that varies in terms of characteristics across countries, it is not the case that there is an easy set of one-size-fits-all policies that you can copy and paste into Israel.”
One issue where there is agreement among all parties, Margalit says, focuses on the question of increasing the retirement age, which is currently 62 for women and 67 for men. There are serious questions, however, regarding how increasing the retirement age should be done, how quickly it should be done and the need for compensation schemes for workers close to retirement, who will likely suffer from the reform.
Another significant issue is the need to improve the skill-sets of older Israeli workers, Margalit added, which are poor when compared to both similar age populations in other countries and younger Israeli workers.
“A lot of reforms in the labor market have major long-term implications, and that you have to start dealing with sooner rather than later. Waiting means that you will have a larger, older population, and have even more technology affecting the demands in the labor market,” Margalit said.
"We are well aware that the Treasury needs to deal with a whole load of budgetary issues that also pressing – but this is actually something that will pay itself back fairly quickly because we have immense expenses for people that are unemployed, or reliant on government assistance programs because they’re not working."
“If we are able to make those older workers stay longer in work, this would increase productivity, increase Israeli output and will ultimately pay itself back through taxation and more.”
According to Prof. Eytan Sheshinski, a senior researcher at IDI and emeritus lecturer in economics at Hebrew University, reforms to Israel’s National Insurance Institute (NII) are required in order to ensure and strengthen its financial resilience in decades to come.
A recent study published by the Bank of Israel warned that the NII is currently running an actuarial deficit and, without reform, is due to run out of funds in 2050. At the same time, mandatory occupational pension funds are struggling to deliver significant returns on investment due to lower interest rates since the 2008 financial crisis, and questions remain regarding whether pensions should be partially indexed to wages rather than the consumer price index.
“Like some other countries, old age allowances from social security in Israel are independent of income,” said Sheshinski. “Benefits are significantly lower than the OECD average, but the idea is to provide a safety net.”
In order to increase the certainty that social security benefits will continue to be paid, and not be subject to budgetary or macro-economic considerations, Sheshinski outlines three possible approaches. A panel of experts formed by IDI is yet to make a specific recommendation.
“Every pay-as-you-go system does not have an automatic pilot balancing revenues and outlays. One approach is to have a mix of fiscal means to ensure actuarially balanced funds for social security,” said Sheshinki, who was recently selected as one of the 90 most prominent living economists in a book titled Economists, edited by Nobel Laureate Robert Solow.
While the NII recently expressed its desire to have jurisdiction over excess funds currently accumulating in the Finance Ministry, Sheshinski states that there should be a “public discussion” over the principles by which the NII would invest those funds.
“A second approach is to leave the system almost as it is now. The old-age care benefits should continue running, but with a small fund to cushion macro-economic shocks, such as a recession or downturn,” said Sheshinski. “They can use that fund to smooth and not change the flow of benefits to retirees.”
A third approach, he adds, is to leave the system as it currently operates, funded by social security contributions.
“Most economies think there should be some actuarial fund, even a small fund to balance macroeconomic volatility – such as in Sweden,” said Sheshinski. “We have quite a reasonable system, all in all. Reforms are required because of demographic changes, and some of the special circumstances in Israel, including populations who do not participate in the labor force.”