As Economic Crisis Hits, Israel Moves to Shore Up Pension Funds

By Richard Boudreaux, Los Angeles Times

December 15, 2008 

Israel 

With financial markets tanking, and taking down retirement accounts, the government sets up a partial safety net for elder workers.

Reporting from Tel Aviv -- Mazal Shachar's computer screen at First International Bank of Israel gives a dismal, up-to-the-minute picture of the country's financial markets. The bookkeeper can earn her salary and watch her nest egg shrink at the same time.

Israeli retirees: An article in Monday's Section A on efforts to shore up pensions in Israel said parliamentary elections are Feb. 3; they are Feb. 10. A caption identified Mazal Shachar as a bank accountant; she is a bank bookkeeper, as the article said. 

As the global financial crisis hits Israel, older workers such as Shachar, 64, a single mother who saved for four decades and thought she was a year away from a comfortable retirement, are feeling the pain.

"It's a slap in the face," she said, estimating that her pension savings had dwindled by 30% this year, to less than $250,000.

The math, she said, is "sad and depressing." Instead of an expected $2,450 a month in retirement, a sum similar to her current salary, she now figures to draw about $1,825, not enough to support herself. "I'm afraid of becoming a burden on my daughter or on the state."

FOR THE RECORD:

An article in Monday's A section about the declining value of Israeli pension funds gave the date of Israel's parliamentary elections as Feb. 3. The correct date is Feb. 10.

Israel's economy has suddenly flattened after five years of enviable growth. Diamond exporters here are hurt by falling international demand. Credit has dried up, forcing smokestack industries and high-tech giants to shed jobs. With tourism income, car sales and charitable donations also plummeting, the country's two chief rabbis recently led a nationwide prayer for divine intervention.

Few Israelis have clamored louder for help than the 250,000 middle- and lower-income workers with corporate pension plans that resemble 401(k)s and who are close to the age at which they can draw full benefits -- 67 for men, 64 for women.

Those pension funds are tied to stocks and bonds and form the bulk of all retirement savings, which also include a modest equivalent of Social Security. The funds have lost one-fifth to one-third of their value as the global crisis has battered Israel's financial markets, economists say.

As Israel scrambles to revive those markets and ease the debt burdens of troubled conglomerates, its leaders have disagreed sharply over how to help the elder workers.

Prime Minister Ehud Olmert last week offered an unconventional solution: a government-financed "safety net" that would partly offset any further pension fund losses incurred by eligible workers after Nov. 30. His Cabinet approved the plan Sunday and gave government regulators six months to mandate a more conservative system for investing older workers' pension savings.

"This is the money they set aside for retirement, and we cannot abandon them," Olmert declared.

Any wage earner who is now 57 or older and has less than $375,000 stashed in a retirement account would qualify. Up to $187,500 of that savings would be guaranteed.

Among developed countries hit by the crisis, Israel is believed to be alone in offering such a direct bailout to retirement savers. But resistance from Finance Minister Roni Bar-On resulted in so many restrictions that the rescue fell short of what Shachar and other workers say they need.

For one thing, the safety net will not address the heavy losses incurred before Nov. 30. And no one covered by the plan can touch retirement savings until December 2011 at the earliest, a hardship for those like Shachar, who had expected to stop working before then.

"It's a hoax," she said bitterly after studying the plan's details last week. "The net is full of holes."

Now three options loom for Shachar when she turns 65 next year: Forfeit the plan's protection and start collecting her pension; wait two years and live on a national insurance stipend, Israel's Social Security; or keep working until age 67.

Predicting a long recession, she's unwilling to give up the safety net. But the insurance stipend is just $450 per month, about half the minimum wage, and her regular savings are not enough to stretch it much.

Her union has asked the bank to keep her on longer, but the outcome of those negotiations is uncertain.

Shachar is a trim woman who puts a premium on gym exercise, sound nutrition and outings to the theater. She had carefully budgeted such expenses from the pension she expected before the crisis hit and still cannot imagine doing without them.

Her family had immigrated from Egypt to the new and then-impoverished state of Israel when she was a child. She learned the value of financial self-reliance, supporting herself and her daughter after a divorce at age 19. Her bank job offered what seemed to be a lifetime of security.

Israel has not been as prudent with its workers' pensions. In 2003, the government seized a network of mismanaged, deficit-plagued pension funds from Histadrut, Israel's main labor federation.

Independent managers assigned to run the funds steered workers' money from low-yield government bonds into stocks and a newly emerging corporate-bond market. Although each employer chose a pension fund and each worker chose a mix of investment categories, few understood what was safe and what wasn't. The government was supposed to regulate the system.

Israeli leaders now admit that they failed to protect the funds from excessive risk. Pension fund managers invested heavily in stocks and bonds sold by two of Israel's biggest tycoons, Lev Leviev and Yitzhak Tshuva, to raise cash for real estate deals in Russia, Eastern Europe, New York and Las Vegas.

As those properties took a beating in the global meltdown this year, investors grew uncertain that the tycoons could honor the bonds, and their value nose-dived. Shares of Leviev's Africa-Israel Investments Ltd. and Tshuva's Delek Group Ltd. also plunged, by more than 75% each, hauling down retirement savings with them.

The benchmark TA-25 index of the Tel Aviv Stock Exchange, the country's only exchange, has fallen 41% this year. Israel's Tel-Bond 40 Index of the top corporate bond issues has dropped 18% in the same period.

The government's initial response, in late November, was a $2.75 billion commitment to bolster financial markets. It will extend guarantees for banks to ease credit and set up funds that will buy bonds from solid firms now unable to raise capital due to the market panic.

Olmert's lame-duck government agreed to consider a pension safety net only after Histadrut, taking up the cause of older workers, threatened a nationwide strike. Every major candidate to succeed Olmert in the Feb. 10 parliamentary elections endorsed the idea of bailing out struggling pension savers along with the tycoons.

Finance Minister Bar-On resisted the idea, calling it a populist response to "mass hysteria." He said it would subsidize better-off savers by taxing poor Israelis who lack pension plans and require a costly bureaucracy to administer.

Bar-On argued that the steps to shore up financial markets would be enough to revive pension savings, making a safety net unnecessary. He lost the argument but managed to limit the scope of the bailouts.

Despite the limits, the safety net "will have a significant impact on Israeli citizens' sense of security," said Sever Plocker, a leading economic commentator here.

"In the United States people are used to looking out for themselves," he said. "In Israel we are used to the government playing a large role in the pension market. Without some kind of safety net, the market for corporate bonds could have crashed."

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