The Cost of Canceling Pension Contributions for Young Workers in Israel
A proposal to cancel mandatory pension savings for workers under 40 in Israel could increase disposable income but risk losing tens of billions in compound investment returns.
Up to 68 billion shekels. This is the maximum estimate of investment profits accumulated over the past decade in pension funds of workers under 40, according to an economic analysis. This figure highlights one of the major risks in the proposal by Prof. Avi Simhon, chairman of the National Economic Council, to cancel the mandatory pension contribution for workers under 40.
The proposal aims to address the soaring cost of living in Israel. During their 20s and 30s, many employees face exceptionally high expenses while their salaries are typically lower than they will be later in their careers. Under the initiative, the employee's contribution of 6% would become optional, while the employer's contribution of 12.5% would continue as usual. For an average couple, this change could increase disposable income by nearly 1,000 shekels a month.
However, the analysis demonstrates how much money early savings years generate for young people and how significant the loss could be for their long-term economic future. Out of approximately 181.5 billion shekels managed for those under 40 in the relevant track, about 114 billion shekels reflect deposited funds, while an additional 68 billion shekels represent investment profits accumulated over the decade.
"A shekel deposited at age 30 is not just a shekel saved for age 67. It generates returns, and those profits begin to generate returns of their own."
Stopping contributions at a young age means missing out on the power of compound interest. A significant portion of young savers' pension wealth is not money that they or their employers put into the fund, but rather money generated because the deposits entered the capital market and remained there over time.
