What’s the best economic news of the past 40 years?
- Was it Reaganomics, which restored America’s economic vitality?
- Was it the collapse of the Soviet Empire, which freed many nations from communist tyranny and allowed at least some of them to successfully shift to markets?
- Was it partial economic liberalization in China, which lifted hundreds of millions of people out of severe poverty?
Those are all good choices, but let’s not overlook Israel.
This chart from Economic Freedom of the World shows that economic freedom dramatically expanded in that nation between 1980 and 2000 (and has since gradually risen).
Israel’s shift away from the voluntary socialism of the kibbutz has paid big dividends. The nation has become far more prosperous.
I’ve already written how Israel benefited from supply-side reduction in tax rates.
Today, let’s learn about the country’s shift to private social security.
To find out what happened, let’s look at some excerpts from an article in Economics and Business Review. Authored by Moshe Manor and Joanna Ratajczak, it starts by observing there’s been a global shift to private social security systems.
The first paradigmatic shift towards a private pension system was performed in Chile in 1981 and had its followers in Latin America… The Chilean example inspired the World Bank to propose
that such a shift should become a key element of the pension reform for postsocialist countries… The shift towards private pension schemes was assumed to meet demographic challenges and the secondary goals of the pension system, especially economic growth accomplished thanks to an acceleration of domestic savings.
This has been a very positive development for the countries that made the shift, by the way.
But let’s focus specifically on the reform in Israel. Here’s some of what the authors wrote.
Israel…abandoned a controlled economy and introduced the market economy only in the last three decades. …In the last 30 years Israel has faced many reforms of the pension system as part of broader economic reforms. …the stabilization programme allowed the Ministry of Finance (MOF) to start a series of structural changes, including pension reforms… The reasons for the reforms were not strictly economic but they also were based on neoliberal economic beliefs, political motives and international relations. …The USA feared Israel’s possible economic collapse and requested that the Israelis execute reforms designed according to Milton Friedman’s neoliberal principles in order to gain American economic support.
For what it’s worth, I’m in favor of “neoliberalism” when it’s defined as pro-market (which seems to be the case in many parts of the world).
Here’s a description of how the reform moved the country from a defined benefit model (often unfunded) to a funded defined contribution model.
The pension reforms were intended to stabilize the system and prepare it for the future difficulties such as ageing and poverty relief; they were also meant to develop the capital market and reduce the burden on the state budget. The main steps included introduction of the mandatory private pension pillar.. The reforms also eliminated PAYG for new joiners and turned the system from actuarially imbalanced, DB…to actuarially balanced, DC, privately managed and invested in capital markets. …The comparison of the reforms in Israel and those in Chile…shows a large similarity: shutting down the PAYG system to new joiners; a shift to funds which are privately managed, DC type, invested in capital markets system; a mandatory pension in the second pillar; development of the local capital markets using the pension accumulation; reduction of government involvement in pensions and of the burden on the state budget.. The main differences encompass low contribution rates in Chile that led to low net replacement rates, while in Israel the contribution rates and net replacement rates are high.
Oddly, the article never states how much of a worker’s paycheck goes to mandatory savings (i.e., the contribution rate).
So here’s a blurb from a recent report by the Organization for Economic Cooperation and Development.
Since January 2008, mandatory contributions have applied to earnings up to the national average wage for all employees… Initially the rates were modest with a total contribution of 2.5% but increased to 15% (5% from employees and 10% from employers) by 2013. In 2014 the contribution rate increased further to 17.5% (5.5% from employees and 12% from employers)and since January 2018 increased to 18.5% (6% from employees and 12.5% from employers). Six percentage points out of the employers’ contribution provides severance insurance which, if utilised, diminishes the pension.
That is a significantly higher level of mandated private savings when compared to countries such as Australia and Chile.
Sadly, the United States isn’t part of that conversation since we’re still stuck with our actuarially bankrupt Social Security scheme.
P.S. While researching this column, I read the OECD’s recent Survey about Israel’s economy. The bureaucrats in Paris groused that there’s a lot of inequality and poverty in that country.
This set of data perfectly illustrates why the OECD is an untrustworthy and biased bureaucracy.
As noted by my Eighth Theorem of Government, it should focus on economic growth to reduce poverty rather than fixating on whether some people are getting richer faster than others are getting richer.
Speaking of which, the supposed poverty data doesn’t actually measure poverty. Instead, “relative poverty” is simply the share of people are below “50% of median household income,” which the OECD then dishonestly characterizes as a measure of poverty (this is how the OECD came up with the absurd claim that there’s more poverty in the United States than in comparatively poor countries such as Turkey and Portugal).
Ironically, the same OECD report admits that Israel is out-performing other developed nations.
Israel is growing faster, as you can see, while also reducing government debt at a time when it’s going up in other countries (I’m sure coronavirus has since wreaked havoc with the Israeli economy, but that’s also true for other OECD countries).
Yet the OECD can’t resist grousing about inequality and lying about poverty.
P.P.S. Shifting back to social security reform, here are some of the other nations (beside Israel, Chile, and Australia) that now benefit from private savings instead of empty political promises: Denmark, Switzerland, Hong Kong, Netherlands, Faroe Islands, and Sweden.
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Image credit: 401(K) 2012 | CC BY-SA 2.0.
