Monday, April 18, 2011

Long Term Structural Things Israel Does Right

The Israeli economy continues to grow faster than expected. The annual rate of growth recorded in the final quarter of 2011 was 7.8%. If we manage to keep it going like that, we'll soon enter Indian territory, from a higher starting point. Part of the growth is a fine rise in exports, which is happening even as the exporters have been kvetching and wailing about the strength of the Shekel:
Israeli industrial exports in the December 2010 to February 2011 period jumped 23% - in annual terms - mostly as a result of a steep rise in high-tech exports, 28.1%, the stats bureau reported. The increase in exports came despite exporters' complaints in recent months over the fall in the dollar against the shekel, reflecting the recovery of Western economies.
This is the sort of thing Jon at Divest This! likes to write about: the more the boycotters strive, the faster Israel's economy grows. I rather doubt there's any correlation, but the growth is welcome and important; keep in mind Yaacov's Three Parameters for measuring Israel's strength, the third of which is economic.

The Economist last week has a long special report on pensions (it begins here). What looked like a great idea in the late 19th century when invented by Bismarck, the eligibility of folks to live off a pension from a certain point in time until the ends of their lives, now accepted nearly universal as a basic right, will cause enormous economic stress in many countries over the next few decades (though the problem may go away by the late 21st century, if that's reassuring). The subject is complex, and actually not the sort of thing this blog usually tells about, but the outlines are simple, and the report sums op the four main issues:
The first is that people are living longer, but they are retiring earlier than they were 40 years ago. A higher proportion of their lives is thus spent in retirement. Second, the large generation of baby-boomers (in America, those born between 1946 and 1964) is now retiring. But the following generations are smaller, leaving the children of the boomers with a huge cost burden.
Third, some employees have been promised pensions linked to their salaries, known as defined-benefit (DB) schemes. In the 1980s and 1990s the true cost of these promises was hidden by a long bull market in equities. But the past dismal decade for stockmarkets depleted those funds and left employers on the hook for the shortfall. Private-sector employers have largely stopped making such promises to new employees; the public sector is beginning to face the same issues, particularly in Britain and America.
Fourth, private-sector employers are now providing pensions in which the payouts are linked to the investment performance of the funds concerned. These defined-contribution (DC) schemes transfer nearly all the risk to the employees. In theory, they can provide an adequate retirement income as long as enough money is paid in, but employees and employers are contributing too little. Both sorts of funded schemes, DB and DC, essentially face the same problem. “The aggregate amount of pension savings is inadequate,” says Roger Urwin.
The situation is Israel is different. There is no baby-boom generation which hangs over its predecessors and descendants. There have been ups and downs in rates of fertility, but at no point have the rates ever been negative. Looking forward, each retiring generation will be followed by a larger one. In spite of this, Israel already has raised the age of retirement to 67, higher than almost anywhere else (though a few far-seeing countries have recently moved to peg the retirement age to longevity; given Israel's high life expectancy, we'll probably have to do the same).

Most Israeli workers are paid from pension funds, not the government budget, and in DC schemes; since these are mandatory by law, most people contribute to them automatically their entire post-student working lives. The pensions are computed as a rough average of contributions throughout one's career, so there's no way to artificially raise decades worth of pension by tweaking the final year or two of a career, as is often done elsewhere.

How is it that Israel seems to have mostly sidestepped a strategic predicament that looms over most developed nations? I don't know. Perhaps we've had some reasonable decision-makers along the way. Netanyahu raised the pension age in 2002 when he was Finance Minster; other parts of the configuration were in place earlier.


Barry Meislin said...

Two words.

Stanley. Fisher.

Silke said...

since my "apprenticeship" at an econ blog after the "crisis" broke I am convinced that countries whose system is rather recent have a better chance of doing well than those whose was established long ago and has been patched expertly and not so expertly innumerable times over the decades. And if Mr. Fisher is responsible for not letting Israel step into the mousetraps of the system which happen to be discussed in Germany as best I remember at least since the 70s, then Israel should erect statues in his praise all over the country.

The most intelligent lecturer I have heard on the looming American pension obligations is Roger Lowenstein and no matter how much finger pointing the US likes to do at us "socialist" Europeans, taken all together it seems that an even bigger part of their GDP goes to non-productive people of all ages.

Also I heard mentioned on and off the problem of China who controlled one problem with its one-child-policy but pretty soon will face another i.e. each child has to take care of (at least) 2 parents and that not only in the money department.

Mark @ Israel said...

What Israel has done in terms of securing the pension of those who are of retirement age is a good example to follow. Why can't the US and other countries set this up also for their people? They should learn some lessons from Israel.

Silke said...

because once you have set up a system of pay as you go it is extremely hard to switch a save first spend later one, the problem being that you will have to get through a period where payments will basically have to double.