Distributive Effects of Israel’s Pension System

Abstract

This paper examines several aspects of Israel's restructured retirement benefits system, focusing on distributive effects. We characterize 10 stylized representative prototypes of Israeli households, reflecting common demographic, wage and employment profiles. These prototypes are used to examine the joint effects of tax benefits for pensions and the public Old Age Allowances program's contributions and disbursements on the lifetime income distribution, net replacement rates at retirement and lifetime consumption smoothing. We find that the system is neutral in terms of its effect on lifetime income distribution, except for the top income decile which gains less than the others. We also find that pension savings result in a net loss for many low-income households, unsmooth their consumption and lead to 'too high' post-retirement net replacement rates. Furthermore, evidence from a unique dataset point to rational and active behavior of households with respect to these incentives, raising questions about the necessity of compulsory pension savings which were enacted in Israel recently.