No cheers for pension tax benefit cut

//No cheers for pension tax benefit cut

No cheers for pension tax benefit cut

By | 2015-11-10T02:29:35+00:00 November 10th, 2015|Business|0 Comments

It behooves us to applaud the Ministry of Finance when it acts in the name of equality, gives to the less well-off, and takes away from the richer and stronger section of the population that enjoys greater tax benefits. Only there’s a problem: what is being taken away now is not being taken from the wealthy, but from the upper levels of the middle class, and this move carries a high risk of causing too many contribution plan pension savers to receive an old age pension that is too low when they reach retirement age. What’s more, what is being taken from them is not being given to the economically weak, certainly not if we look at the long term.

The fear of harm to many middle class savers, which we will see only decades from now, long after yesterday’s Knesset Finance Committee hearing is forgotten, stems from the fact that many workers, chiefly in the private sector, will prefer to reduce their tax payments and choose the present over the future, by making pension contributions on the basis of a lower amount than their actual salaries. They can ask their employers not to set aside their share of the pension contribution, and to receive it as salary instead. Over the years, this will open up a large gap between the salary they live on and the pension that is supposed to sustain them in old age.

Let us recall that we are talking about the workers who bear a substantial portion of the direct tax burden but who are not so well off that they can relax and be confident that their economic future is settled. These workers will reach retirement with a much lower pension-salary substitution rate than they expected to receive, and will experience a substantial drop in their standard of living.

This will be even more problematic for those who earn more than 2.5 times the average salary for a few years and will not be able to maximize the tax benefits over their entire working career and save more during the good years.

Why do I claim that what is being taken from the “strong” is not being given to the weak? After all, the Ministry of Finance and Knesset Finance Committee chairman MK Moshe Gafni struck a “social’ deal whereby the Ministry of Finance will receive the tax benefit cut it so much wanted and in exchange will give money to social programs such as grants to doctors in the periphery.

On the face of it, the Ministry of Finance receives NIS 100 million a year and gives NIS 100 million a year. The social goals, however, come with an expiry date of two-three years, and are not a multi-year rolling budget, whereas the reduction in the benefit ceiling for pensions is permanent.

This move is no surprise. This is the logic that has prevailed for years in the higher echelons of the Ministry of Finance: to save expenditure and let the citizen be solely responsible for his or her pension. For its part, the state throws everyone into the deep end, and whoever swims, swims.

Actually, it doesn’t throw everyone. The state is afraid to touch its most long-standing and best-protected workers: those who are entitled to unfunded pensions. It should not be forgotten that at first the talk was of reducing the benefit ceiling for those saving for a contribution plan pension alongside a reduction in the rights of those entitled to unfunded pensions, who in practice should have raised the amount they are required to set aside for the far superior savings plan that they receive. But time went by and the members of Knesset discussed only the cut in benefits for contribution plan pensions, while there was no discussion at all of unfunded pensions.

Meanwhile the fear grows that in the name of equality the state is not really contributing to less well-off savers (which it could have done by, for example, changing the way that designated bonds are allocated, or through state participation in savings of the economically weak), but it is taking from the stronger workers who bear a large portion of the tax burden, and is running the risk of turning them into much weaker pensioners.

So there is a contribution to equality. It’s just a pity that it is being made by dragging people down lower.

Published by Globes [online], Israel business news – www.globes-online.com – on November 9, 2015

Copyright of Globes Publisher Itonut (1983) Ltd. 2015