Don’t count on your pension!

You know that tidy monthly income you were counting on, paid from your own pension savings? World travel you dreamed of? Gifts for your children and grandchildren? A life of serenity, after decades of hard work, supporting yourself and your family? Well, forget it. The way things are going, chances are your pension will be far less than adequate, let alone generous. And in the worst case, it might not even exist at all. Unless, that is, you happen to be an MK (Member of Knesset). Those gloomy words apply to Israel and with few exceptions, to most Western nations. People are entering the work force later, living longer, saving less – and earning lower interest on savings than in the past. In the West, as the baby-boom generation reaches retirement, and the baby-bust generation has to fork over big sums to support them, a crisis is emerging. In Israel, pension fund management fees are high, taking over the years as much as 30% of the final accumulated pension savings. Partly as a result, there has been a 50% fall in the fraction of pre-retirement salaries paid as pensions. Once, from 10,000 shekels in monthly pre-retirement salary, pensioners got 7,000 shekels – today, it is 5,000 shekels or much less. And that percentage is declining. As a direct result, pensioners' standard of living falls by half or more, overnight, when they retire. To understand the pension pickle we're in, we need to look into the recent past. In 2008, with government and Histadrut (national labor union) pension funds facing bankruptcy, the Knesset passed a law making pension saving mandatory for working people and, later, for independent businesspersons. But privatizing pensions simply kicked the pension can down the road, shifting responsibility from the government coffers to individuals and the free market. And the free market has failed. Basically, Israel has shifted from a defined benefit (DB) system, which pays a guaranteed monthly pension, to a defined contribution (DC) system, in which a defined amount is paid in and what is paid out as a pension depends on pension fund earnings from investments made over many years. The DB system threatened to bankrupt governments. The DC system threatens to impoverish most people when they retire. Sadly, the year pension saving became mandatory in Israel, the global financial crisis erupted. As central banks fought the crisis by flooding credit markets with money, interest rates fell to near-zero. Returns on pension investments plummeted. They are still at historical lows. The Knesset has barely begun to address the crisis. For instance, on July 18, 2017, the Knesset Finance Committee killed a proposal to increase the retirement age, after facing a firestorm of protest. The question is why not make retirement voluntary rather than compulsory as at present? Give us a choice. Let those who want to continue to work, and need to, have that option. I know of a senior doctor, a family physician, forced to retire at age 67, who teaches medical students without pay, because his 'slot' was closed on his retirement. This is a travesty. Prize-winning Channel 1 investigative journalist Shaul Amsterdamski aired a four-part series in late July, titled “In Search of Our Lost Pensions.” He interviewed a wide range of individuals. Michelle, a dancer and actress. said she desired a pension of 2,000 shekels a month. For this, Amsterdamski noted, she would need to save 500,000 shekels. Currently, she works at a variety of temporary jobs; her predicted actual pension based on current earnings and pension savings is 54 shekels a month. Eyal, a teacher who left high-tech for education, lives in Tel Aviv and wants a pension of 10,000 shekels a month. For this he needs to save 2 million shekels. His current pension savings total 200,000 shekels. This will, if continued to retirement, provide Eyal with a pension of 2,383 shekels. Adi, a computer programmer, desires a pension of 20,000 shekels net per month. His current pension saving would give him, on retirement, 325.79 shekels a month. All this information appears in the monthly statement that pension funds are required to supply. But the form is so complex, few people read it or understand it. What about the old age pensions paid by National Insurance? Will that not supplement our private pension savings? But even that small monthly sum is at risk. The current National Insurance old age pension is 1,535 shekels ($426) for an individual and 2,307 shekels ($890) for a couple. Labor and Welfare Minister Haim Katz is the minister with direct responsibility for National Insurance. Katz has now blown the whistle. By his ministry's calculations, in four years, the National Insurance Fund into which national insurance payments are paid, and from which old age pensions and other benefits are paid out, will begin to diminish, as payouts exceed income. And in 19 years, the Fund will be empty. The situation in the US is even worse. There, the main Social Security Fund will begin paying out more in benefits than it generates in annual revenue by 2022. And just 12 years after that, in 2034, the Fund will completely exhaust its $3 trillion in reserves; it will be bankrupt. Katz wants to legislate automatic increases in national insurance payments (which are really taxes) to keep the Fund solvent. This is unjust. It is robbing the young to pay the old. And if implemented, it may touch off a bitter “war” between old and young generations. Why have governments in Israel and elsewhere failed to even begin to address the pension crisis? It is because the crisis won't really explode for a decade or more. Even Minister Katz's numbers show National Insurance bankruptcy won't occur for nearly two decades. By then, our current elected officials will have retired with their own generous pensions they have voted for themselves. Meir Shetreet, for instance, served admirably as an MK for 30 years. He now receives a pension of some 42,000 shekels a month, before tax. It is well-deserved. But the contrast between what elected officials vote themselves and what the citizens they represent receive is stark. How can a democratic society, chronically myopic, be awakened from its torpor to deal with crisis situations that threaten to occur only a decade or more in the future? How can a society that is single-mindedly present-oriented be persuaded to save more for the future, rather than enjoy life today? Paradoxically, the more economists and journalists like Amsterdamski scream about our lost pensions, the less people want to save. The young say, if the future is hopeless anyway, why not live well today, spend and enjoy? The key to solving the pension crisis is to understand that if Israel waits a decade to fix the problem when a million or more pensioners become paupers, it will be too late. Only if sufficient resources are set aside today and invested wisely can the power of compound interest bring retirees an adequate pension. Here are two possible solutions. One is built on sweeping policy reform. A second is built on individual common sense and pragmatism. They are not incompatible. Both can work well together. First, policy. My colleague, Moshe Gerstenhaber, a retired successful entrepreneur, has for 25 years been proposing a four-part solution. Together we have built a detailed radical proposal. • Take half of one percent of GDP annually (less than $2 billion, a mere drop in the bucket out of a total government budget of $270 billion) and use it to provide a $10,000 grant at birth to each of the 180,000 babies born yearly. • Use the money to build new, privately managed wealth funds that invest in Israel's real economy – infrastructure, small business, technology. • Freeze those grants, disallowing any withdrawals, until age 70 (today's small baby grants become available for spending at age 18). At 5% real return, that $10,000 grant grows to 30 times more, or $300,000 (over a million shekels) by age 70, and by age 95, that fund will distribute $550,000 in benefits, or a monthly pension of $1,850 (6,600 shekels) for each retiree. • Create a user-friendly website, employing artificial intelligence, to help everyone manage their savings, skills, career and retirement choices. Today, financial literacy is abysmal. And tomorrow, retaining any job will be a challenge unless new skills are learned. A second complementary solution is driven by individual pragmatism. Author Steven Johnson wrote an essay for the Wall Street Journal in which he explained the art of the “adjacent possible.” The adjacent possible “captures both the limits and the creative potential of change and innovation. It's the ever-present set of opportunities at the boundaries of our reach. Its boundaries grow as you explore them. Each new combination opens up the possibility of other new combinations,” he wrote. To implement Johnson's approach, let each of us ponder, as we approach retirement, what we know and can do to bring value to others that is different enough from what we do now to be interesting and avoid boredom, but similar enough to be practical, feasible and create value for others and for society. For example, I took early retirement from the Technion in 2001 and as academic director of the Technion Institute of Management, worked for a decade with start-ups and global hi-tech companies. After teaching innovation for decades, I now help entrepreneurs and managers implement it. That adventure led to several books on creativity and innovation that I could not have written had I remained mired in an office and classroom. The adjacent possible has kept my brain alive. If we are forced to retire by an archaic law, let that be an opportunity to tackle new things. Sixty-five-year-old Israelis live on average 20 more years to age 85.4. And many live far longer. Those numbers will rise, as medical science advances longevity. Today 12% of Israel's population, or 900,000, is age 65 and older. By 2035 that number will almost double. Let us pensioners find adjacent possibilities to remain relevant and productive, and earn supplementary income sufficient to enable us to live in dignity. If our government is impotent, let us take the initiative and find our own independent solutions. For instance, I know of several successful start-ups launched by entrepreneurs 70 and older. Harvard Business School Prof. John Kotter teaches that the first essential step toward implementing change is to establish a sense of urgency. With so many fires breaking out, figuratively and literally, on Israel's borders, it is hard to draw attention to a blaze that could consume us a decade or more in the future. British economist John Maynard Keynes said famously in 1923, “in the long run we are all dead.” This is widely quoted and invariably misunderstood. Keynes was not advocating short-run myopia. The opposite! He was responding to the prevailing economic dogma that given time, market forces optimize our economy in the long run. Not so, said Keynes. Government policy must tackle long-run crises now, today. If Keynes were alive today, and addressed the Knesset, he would advise an immediate and sizeable increase in national saving to fund investment in real neglected assets. This is an ideal time to do it. Israel's net national saving, after deducting depreciation, is less than 10% of GDP. This is not adequate. And Israel's public debt is only 60% of GDP, down from 95% in 1996. Standard & Poor has just boosted Israel's credit rating, from A+ to AA- with a stable outlook, Israel's highest credit rating ever. This places Israel in a rare club of 17 highly credit-worthy nations. It will save hundreds of millions of shekels in annual interest charges. Finance Minister Moshe Kahlon has promised to use that saving in social welfare. Why not invest it in our future to save our future and pensions? By 2048, the total population of Israel will reach some 16 million, rising from under 9 million today. During the next 30 years Israel will welcome some eight million new babies and say goodbye to some 1.6 million grandparents. The babies and the aged will each require massive resources. Are our leaders ready to act? Or will we, in a few years, lament the neglect and inaction? The writer heads the Zvi Griliches Research Data Center at the S. Neaman Institute, Technion and blogs at www.timnovate.wordpress.com

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Don’t count on your pension!

The key to solving the pension crisis is to understand that if Israel waits a decade to fix the problem when a million or more pensioners become paupers, it will be too late.

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