The Ministry of Finance is unable to estimate the state's liability for IDF bridging pensions, Accountant General Michal Abadi-Boiangiu today revealed at a press conference on the occasion of the publication of Israel's 2015 financial reports.
The unfunded pension figures published today highlight problems discussed at length in "Globes" in recent years. For example, regular judges and religious court judges are entitled to pensions putting them in a class of their own their average monthly pension is NIS 40,000, compared with NIS 19,000 for elected public officials, NIS 14,000 for State Comptroller's Office employees, and NIS 5,500-6,500 for "ordinary" state employees.
A judge receives the highest state pension - NIS 89,000 a month. The 19 next largest pensions, amounting to NIS 57,000-89,000 a month, are also paid to judges. The reason is that judges accumulate up to 7% of their last monthly paycheck a year, compared with the usual 2% for other civil service employees. Another officeholder benefiting from exceptional retirement terms is the state president, who is automatically entitled to a pension equal to 70% of his last paycheck, regardless of how long he served. The average monthly pension of ex-presidents is as high as NIS 56,000.
Bridging pensions a bottomless pit
A bridging pension is promised to all retirees from the permanent army (age 43 for offices and age 53 for NCOs) from their date of retirement until they reach the legal pension age (67 for men and 63 for women). Abadi-Boiangiu said, "We do not have the figures from the IDF that could enable us to make a reliable calculation of the cost of the bridging pension. This is a significant budget liability for which we have no estimate in the reports." It also emerges that some IDF pensioners received a pension higher than the legal maximum of 76% of their last salary.
The Accountant General devoted a great deal of space in the report to analyzing the extent of the state's unfunded pension liability, currently estimated at NIS 746 billion, and said, "A pension is not a dictate over which we have no control. It is a result of personnel management, and personnel management therefore has a dramatic effect on the budget."
The final 2015 government budget deficit totaled 2.2% of GDP, the lowest figure since the 2008 global credit crisis. As of the end of 2015, state assets totaled NIS 525 billion, and state liabilities totaled NIS 2.3 trillion, meaning a NIS 1.7 trillion equity deficit. This figure, however, is partial, and does not reflect all assets and liabilities.
Enormous increase in Education Ministry spending
At today's press conference, Abadi-Boiangiu said the reports were, "The result of a very great effort, in which I had many partners in reliable and correct listing of government activity, state assets and liabilities, actual state budget spending, and the deficit. Although I have been the accountant of a bank, nothing looks like the state's financial report, which consolidates 191 different agencies, government ministries, statutory corporations, and government companies."
Abadi-Boiangiu noted that the final deficit figure for 2015 was almost identical to the 2.15% estimate she published in early January, showing the information systems management capability of the Accountant General department. A temporary budget was used in 2015 until the end of November, which usually reduced budgetary spending, although 2015 spending by civilian ministries and the Ministry of Defense actually rose by 5% and 3%, respectively, in comparison with 2013.
The spending items in the budget show a slight rise in the proportion of spending by civilian ministries from 68.2% in 2014 to 68.8% in 2015, which Abadi-Boiangiu attributed to the large drop in the state's interest payments as a result of the low interest environment and the low ratio of debt to GDP.
For the second consecutive year, the Accountant General is publishing figures for actual budget spending by government ministries. The most prominent feature was an enormous rise in spending by the Ministry of Education, from NIS 34 billion in 2010 to NIS 49 billion in 2015. Another prominent increase was by the Ministry of Health, whose spending rose from NIS 18.9 billion in 2010 to NIS 27.8 billion in 2015. The Knesset's expenses soared from NIS 760 million in 2014 to NIS 1.137 billion, following the elections, and spending by the State Comptroller's Office was also NIS 100 million more than in 2014 (NIS 299 million in 2014 versus NIS 401 million this year), due to the completion of the new State Comptroller's office building.
Ministry of Defense spending reached NIS 70 billion (the Accountant General's figures refer to the entire defense establishment, including, in addition to the IDF, the Israel Security Agency, the Mossad, and the Israel Atomic Energy Commission). The report lists all Ministry of Defense contracts of NIS 100 million or more, headed by the procurement of the F-35 warplane, which was increased to NIS 22.8 billion in 2015.
For the first time, the Accountant General included in the report a list of the budget transfers and changes made during the fiscal year. The analysis showed that in 2015, the Ministry of Finance transferred NIS 5.5 billion in non-binding surpluses left over from 2014. Actual spending by the government ministries totaled 93% of the final budget.
Unfunded pension payments to state employees totaled NIS 14 billion in 2015, but with the addition of the IDF and the security agencies, Israel Police, Israel Prison Service, and educational employees, the current payments reached NIS 21 billion. This sum is projected to increase annually, reaching a peak of NIS 38 billion in 2039. This, however, is only 1% of the GDP projected in 2039, compared with 1.6% at present.
In addition to pension payments, state support of the old pension funds amounted to NIS 4.2 billion. A third sum is the subsidy for designated bonds, which amounted to NIS 4.8 billion in 2015, compared with NIS 3.8 billion in 2014, following the decline in the costs of raising government debt. The subsidy is granted because pension savers in executive pension funds and insurance policies benefit from the fact that these entities can invest up to 30% of their assets in state bonds guaranteeing a 4.86% annual yield much higher than the interest rate paid by the state when it raises bonds in the markets.
The subsidy for designated bonds is projected to cost 1% of GDP
The last figure that does not appear in the reports is the bridging pension, the amount of which is unknown to the Accountant General, because she did not receive the information necessary to calculate the actuarial liability in respect of the bridging pensions. The bridging pension is an allocation guaranteed to those serving in the permanent army and security services employees from the date of their early retirement (43 for officers in the permanent army) until the legal retirement age (67 for men). This is the only unfunded pension arrangement in Israel still open for new people to join, and expenses from it are not expected to fall even 30 years from now. The actuarial liability totals NIS 746 billion.
For the first time, the Accountant General's report spells out the procedures for determining the unfunded pension, which she calls, "a check for a person for the rest of his life and to his relatives" (a widow and minor children are entitled to a partial pension). She adds, "There is no uniformity in the procedures for determining the unfunded pension allowance." The pension rights accumulated by a state employee are determined by the Civil Service Commissioner under the Accountant General's supervision. The Judicial Authority is responsible for judges' pensions, the defense agencies' leaders are responsible for their employees' pensions, and the Knesset is responsible for the pensions of Knesset employees and MKs.
Three bodies benefit from control over the entire process of determining, supervising, and payment of their pensions: the Knesset, ministers and the president, and the IDF.
Up to 76% of the last salary
The Accountant General also lists the formulas for calculating the unfunded pension set at a rate of up to 70% of the pensioner's last salary. The rule is 2% of the determining salary for each year of service, with the only exceptions being judges and jurists, who are entitled to an accumulation rate of 3-7% a year. Under certain circumstances, the Civil Service Commission rules allow the Civil Service Commissioner to raise the rank of retirees aged 60+ by one rank before retirement.
There are rules in the IDF and other defense agencies for increases and a possibility of granting a rank before retirement. It is allowed to add three years of compulsory military service to a pensioner's service period, therefore adding 6% more to his pension. A check by the Accountant General, however, showed that there are pensioners whose pensions exceed the 76% ceiling.
Published by Globes [online], Israel business news - www.globes-online.com - on July 19, 2016
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