The Evolution of Israel's Social Security System

Structure, Time Pattern and Macroeconomic Impact

Haim Barkai

• Publisher: Routledge
• Year: 2019
• Topic: Business
• eBook ISBN:
  9780429793363
• Subtopic: Business General
• Index: Business

First published in 1998, this study offers a survey of the conceptual background, the political dimension, and the macroeconomic context and constraints of the social security system in Israel, which in four decades (since the mid-1950s) grew virtually from scratch into a comprehensive system, similar in scope to that of Western and Northern Europe, North America, the European outposts in the antipodes and, of course, Japan.

1   The Post-War New Socio-Economie Order

One of the major components of post-World War II social policy in industrial countries is the so-called ‘cash-entitlement’ programs: these involve payments made by the state to certain beneficiaries specified by law: old-age pensioners and their surviving dependents, children, the disabled and the unemployed—to mention only the most important recipients. Though specified in nominal terms, statutory linkage techniques maintain the real value of these pensions and allowances in the medium and long run.

Several components of these programs had been in operation in some countries even before World War I: Bismarck’s old-age and disability programs in Germany in the last quarter of the 19th century; and Lloyd George’s reform of 1908 in Great Britain, which set up the government-controlled programs of old-age, disability and health insurance schemes. However, these and other early programs in several industrialized European countries applied only to a fraction of the community, chiefly members of the blue-collar, wage-earning working class. The post-World War II decade, in which social policy moved to center stage in all industrialized countries, saw the rapid extension of these programs into multidimensional, universal social insurance programs. The most important of these, especially old-age pensions and disability programs, were to be financed, in theory at least, by compulsory contributions—’social security (payroll) taxes’—made by the population out of income earned in the course of a worker’s entire economically-active lifetime.

The specific features of these entitlements—universal coverage and benefits designed to ensure a socially desired level of sustenance—had far-reaching macrosocial and macroeconomic implications. The exclusion of a means test as a condition for eligibility was the rationale for the inherent universality features of the social security systems established in the industrialized world in the postwar era. These systems, designed to overcome the ‘adverse selection’ prevailing in the private insurance market, accordingly involved compulsory contributions and corresponding universal entitlements. Yet, though designed to meet a social target, the sheer size of the flows of both contributions and benefits soon had a serious and rapidly growing impact on relevant economic aggregates: on the fiscal stance (hence on the size of government), on disposable income (which endowed them with a potential role as macroeconomic stabilizers) and on the disposable income of specific income brackets. Finally, the rising rates of payroll taxes turned them into a significant component of the cost of labor, thus into a major factor in labor markets which, on the other side of the coin, had to operate in an environment affected by the (potentially) high unemployment benefits financed by these payroll taxes.

The political implications of these programs were no less relevant to the workings of the social intercourse in industrial countries after World War II. The relative social (and political) peace in these democracies during the second half of the 20th century can no doubt also be attributed to the reasonable operation of this socio-economic contrivance. For better or for worse, these huge programs soon became the dominant mechanism of income redistribution within and between generations, and between groups belonging to different income brackets, as lower-income groups were clearly targeted as net beneficiaries of these programs.

Less than a decade after achieving independence in 1948, Israel joined what can be described as the ‘social security club’ made up of the industrial countries. However, this policy was put in place in spite of the fact that Israel’s economic capacity and performance had barely reached the lower rungs of the average per capita income of the industrialized countries. Within one generation, by the early 1980s, Israel not only managed to enter (the tail-end) ofthat relatively small group of industrial countries, in terms of per capita income, it was by that time already a full-fledged welfare state in its own right, with a comprehensive social security system.

In what follows, we propose to survey the evolution of Israel’s social security system, its building blocks and development during four decades, and the issues facing it in its fifth decade—in the second half of the 1990s. The macroeconomic impact of social security on the workings of the economy will be studied in the context of the time pattern of growth and the strains and stresses to which the economic system had been subjected. A feasible reform of the system, which in its fifth decade had moved close or even beyond what might be described as the (invisible) social security frontier, is the focus of the closing chapter.

2 The Structure and Pattern of Transfer Payments in the 1980s

1 Transfers, Economic Aggregates and the Role of the National Insurance Institute (NII)

The social security dimension of the Israeli welfare state in the 1980s is described in terms of transfer payments. A bird’s-eye view of the comparative cost and composition of cash entitlements is offered by the series presented in Table 1, Appendix Table A.1, and Figure 1. These data, which refer only to the main transfer payment programs, lumping all other programs into a single residual category, show that transfer payments were a major element in Israel’s social policy during the 1980s. In fact, they were quite similar in size, in terms of GNP shares, to the social policies pursued in advanced industrial countries.

By the mid-1980s, a universal system of old-age and survivor pensions, work injury and maternity benefits had been in place for about three decades. Other programs run by the NII—comprehensive child allowances, disability benefits, unemployment benefits, income maintenance supplements, compensation to civilian causalities of enemy action, alimony payments, and several other smaller schemes—were relative latecomers, but were already well established by the end of the 1980s.

From its inception, the NII also ran a program compensating reservists for earnings forgone as a result of active reserve duty compensation (ARDC). From a purely social-accounting point of view this is not exactly a transfer payment, though some of its features warrant its identification as such. Finally, government ministries, especially the Ministry of Defense and the Ministry of Absorption, administer two major programs: a disabled veterans and veterans’ survivors program, and cash absorption grants to new immigrants. Local authorities and the Jewish Agency also run welfare programs, though minor ones in terms of coverage and cost.¹

The universality of a social insurance system is revealed by the ratio of the number of insured persons to the total population. In Israel, this ratio was 42-44 percent in the second half of the 1980s, covering virtually every legal resident of the relevant age group in the country. Reference to the size of the labor force probably offers the best measure of universality. The number of insured persons was around 125 percent of the labor force in the 1980s and through the early 1990s. This greater-than-unity ratio reflects the inclusion of a ‘non-hired and not self-employed’ category, in effect, insured women working exclusively in their own households, and university students. Omitting this category yields a ratio of about 100 percent for the whole decade.²

The most important indicator of the system’s economic impact is, of course, the size of the relevant flows administered by it in comparison with the major economic aggregates: the flow of payments to beneficiaries and the NII’s revenues from compulsory contributions in terms of GNP and disposable national income and in relation to the size of the budget. The relevant figures for the late 1980s are presented in Tables 1 and 5 (and Appendix Tables A.l and A.5). In 1989, the last year before the resurgence of mass immigration, cash entitlements were already 8.4 percent of GDP and about 12.4 percent of disposable income, which for several purposes is a more appropriate criterion.³ Five-year averages are obviously a more relevant gauge of the macroeconomic significance of transfer payments than single year observations; they suggest that in the second half of the 1980s the ratios of ‘entitlement income’ to GNP and to disposable income were about 8 percent and about 12 percent of GNP and disposable income, respectively (Table 1 and Figure 1).

Table 1. Transfer Payments: Ratios to GNP and to Disposable Income—Selected Years, 1955-1995^a

Figure 1. Transfer Payments as Percent of GNP, 1955-1995

Source: Appendix Table A.1, Columns (1)—(3).

Column (2) in Tables 1 and 4 show the share of entitlements administered by the NII, underlining the NII’s role as the dominant purveyor of cash benefits to the eligible population. Towards the end of the 1980s these NII payments stood at about 83 percent of total transfers and at 7.1 percent of GNP and about 11 percent of disposable income from domestic economic activity—an all-time high.⁴ About 16 percent of these NII transfers were benefits paid under ‘non-contributory programs’ in NII terminology, a combination of schemes deliberately financed (in part or fully) by general tax revenues rather than by the social security payroll and self-employed contributions.⁵ The most important of these were means-tested income-maintenance supplements to old-age pensioners, benefits for general disability, and civilian casualties (and survivors) of enemy action.

The two main programs, in terms of their claims on financial resources, were the old-age pensions and child allowances, the former only marginally financed by general tax revenues. These were absorbing about 39 and 20 percent, respectively of total transfer payments (Table 4). At 5.3 percent and 2.3 percent of disposable income, respectively (Appendix Table A.1) in the late 1980s, they were therefore clearly important determinants of income distribution and other features of the overall social scene.

Finally, the difference between the data on the 1980s in columns (1) and (2) of Table 1 (and Appendix Table A.1) reflects mainly, though not exclusively, the cost of disability and veterans’ survivors benefits. This difference made up almost 2 percent of disposable income towards the end of the 1980s. These Ministry of Defense benefits thus came to about 1.5 percent of disposable income, a significant magnitude, amounting to over 10 percent of total cash transfers in 1985-89 and to about 30 percent of the cost of old-age pensions and income maintenance cash benefits.⁶ This high proportion expresses the long-run cost of Israel’s defense posture. The age structure of the veterans and veterans’ survivors population suggests that the size of this component of entitlements will persist through the first decade of the next century even if no major war is waged. The burden of Israel’s defense posture is also expressed in terms of the cost of compensation for active reserve service, which, according to Table 3, was about 10 percent of total NII benefits in the 1980s (about 0.8 percent of GNP; Table 7).

2 Benefit Rates in the 1980s

a A rapidly rising trend

A panoramic view of the social security systems in the 1980s is presented in Table 2 and Appendix Table A.2, which show the overall trend of total transfer payments (entitlements) and the trend of their dominant components: benefits administered by the NII. The social and economic significance of the pattern that emerges from the data is underlined by the comparative rates of population growth and the growth of total transfers to households. The population grew at an annual average rate of 1.7, quite rapidly for an industrialized country (double the rate in the EEC and only slightly less than double the rate in OECD countries). Entitlements, which grew by 73 percent through 1989 (at an annual rate of 6.3 percent) before the advent of renewed mass immigration, outpaced population growth by a factor of about 4.5. The dominant group, transfers administered by the NII, grew at an average annual rate that was just over five times the rate at which the population increased (Table 2, columns 2-4).

The social dimension of these population and transfers series emerges from the per capita series, which reveal that per capita transfers grew by about 50 percent during the 1980s. On its own, this need not imply that per capita benefits grew at the same rate, as would indeed be the case if the growth rate of the number of benefit recipients was equal to or lower than that of the population. But in view of the figures, even a rough comparison suggests a steep increase in the real income per beneficiary, since it would not be reasonable to assume that the average annual growth rate of beneficiaries in the 1980s was over 50 percent higher than the population growth rate.

The data pertaining to the two main programs (the number of old-age pensioners and children benefiting from child allowances) show that while the former increased by 23 percent in this decade (Table 8 below), their benefits grew by 91 percent signifying a 55 percent increase in this group’s real per capita income. The number of children for whom child allowances were paid was 18 percent lower in 1989 than in 1980, by design (Table 8), so that the per capita benefit per entitled child grew by 67 percent.

The income distribution features of these developments have obvious social implications and microeconomic effects whose impact on social accounting aggregates shows up in the GDP figures. The annual average growth of per capita product in the 1980s was only 1.1 percent, much lower than the 5 percent average annual growth rate of the transfers per capita paid out by the NII and the 4.5 percent annual growth rate of total entitlements (see Figure 2).

Table 2. Transfers and NU Benefits, Total and Per Capita: 1955-95^a(Index: 1980 = 100; 1986 prices)

Figure 2. Total Transfers and NII Benefits, 1965-1995

Source: Appendix Table A.2, Columns (1), (3)—(4)

Figure 3. Transfers and NII Benefits Per Capita, 1965-1995

Source: Appendix Table A.2, Columns (8)-(9).

This means that a rapidly growing fraction of disposable (national) income had been shifted to ‘entitlements’, which represent the legal right to draw on social product without providing any coterminous productive services in return. The strain that such a disparity between the long-term trend of production and the rapidly rising fraction of disposable income distributed as transfer payments creates after a decade (or two decades, at most) cannot be disputed. Its long-run impact on effort, especially among low-income earn...

Table of contents

• Cover
• Half Title
• Dedication
• Title Page
• Copyright Page
• Table of Contents
• List of Tables and Figures
• Preface
• 1. The Post-War New Socio-Economic Order
• 2. The Structure and Pattern of Transfer Payments in the 1980s
• 3. The Emergence of Social Security: The Israeli Variety
• 4. The 1970-74 ‘New Departure’ and Its Fiscal Implications
• 5. The Frontier of Israel’s Social Security System
• 6. The Frontier of Welfare States in the 1990s: Implications for Israel
• 7. Social Security: Outlines of a Feasible Reform
• Appendix Tables
• Bibliography
• Index