1. Research Department Bank of Israel
Pension Policy Design and Income inequality: Assumptions and Reality in a World of Multiple Policy-Instruments
Adi Brender
Research Department Bank of Israel
Seminar on: Aging, Retirement and Pensions: Trends, Challenges and Policy - March 2018
The opinions and analysis presented in this lecture do not necessarily reflect those of the Bank of Israel

2. Income Profiles Assumption: Reality: Significance
Examining the average is good enough.
Wages increase monotonically (weakly) over the years.
Pensions need to replace a (high) proportion of the last wage.
Reality:
Wage patterns differ between people
Low income at early years is associated with flatter wage profiles (1%-1.5% real avg. annual differential) and with spouses with lower wage or employment tenure.
Significance
Different required contribution rates.
Given a (more or less) fixed monthly social security old-age allowance, low income individuals need to contribute even less.

3. Income distribution within cohorts is persistent
Wage distribution of employees aged in 2000 who worked in 2015.

4. Work Status Given the Spouse's Income
For a given (lump-sum) OAA, a non-working spouse implies lower household income in working years and lower required replacement rate.

5. Individuals or Families?
Assumption (or common practice)
Pension calculations can be based on individual incomes
Reality
People live in families
Not all adults (especially women) work all the time
Employed people have children
Pay mortgages
Live in couples when they retire
Significance
Smoothing “standardized” income?
Accounting for liquidity at the contribution stage
Accounting for spouse’s social security Old-age allowance

6. Family Characteristics of Employees
Israel 2005: Tax records sample

7. There is Such thing as “Too Much” Savings
30%-35% 6%

9. How did it play out in policy
People should save to secure sufficient resources for their post-retirement years.
The OAA in Israel provide reasonable replacement rates for many low-income individuals.
Given their flat income profiles and family characteristics, for these people pension savings hurt income smoothing, and reduce their net social security benefits.
High-income individuals enjoy tax benefits equivalent to the social security benefits of low-income ones; mandatory pension savings unbalance the system against low-income households.
Mandatory savings applied to the low-income household – most high-income ones saved anyway.
The “correction”: phasing-out OAA represents a regressive move, This was not what supporters of the program believed.