First Year of the Mandatory Pension Arrangement: Compliance with the Arrangement as an Indication of its Potential Implications for Labor Supply

Adi Brender ()

No 2011.05, Bank of Israel Working Papers from Bank of Israel

Abstract: Since 2008, Israel is gradually implementing a universal mandatory pension arrangement. The arrangement is found to have had a significant effect: about half of the employees that did not contribute to a pension arrangement in 2007, and continued working in 2008, began to save. In comparison, only one sixth of those who did not save in 2006 began saving in 2007. Nevertheless, a significant part of the target group did not start saving, and this avoidance is found to be negatively correlated with the predicted desirability of pension savings for the employee. Key factors affecting the avoidance are: earnings below the income-tax threshold, a non-working spouse and being employed by a small employer. Most of those who began saving did so at the minimum mandated contribution rates, and the discretionary tendency to contribute above the minimum rate, is positively correlated with estimated pension desirability. This conduct indicates that a significant segment of the target group views mandatory pensions as a burden, and tries to avoid it; a behavior consistent with ex-ante calculations that show that it is indeed not beneficial for them. Further analysis shows that full implementation of the arrangement may result in a significant negative effect on the employment of low-income populations. Additionally, based on the existing legislation, tax revenue loss due to mandatory pensions far exceeds the future savings in means-tested old-age allowances.

Keywords: Mandatory pensions; Effective tax rate; welfare policy; tax wedge (search for similar items in EconPapers)
Pages: 34 pages
Date: 2011-05
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