September 17, 2018 / 12:30 PM / 3 months ago

Social Security to end payments to Israeli government, deficit may jump

JERUSALEM (Reuters) - Israel’s social security agency will halt giving its annual surplus to the government starting in 2019, its chief executive said, a move a finance ministry source said could sharply boost the budget deficit and harm essential services.

The National Insurance Institute (NII) has been transferring the surplus to the Finance Ministry since 1980, but with deficits projected to start in four years and bankruptcy foreseen in 2037, the agency feels it needs to hold on to the funds and invest them itself, its chief executive said.

Meir Shpigler, the NII’s CEO, said the NII has provided the government with more than 200 billion shekels ($56 billion) in nearly 40 years.

The money should have been put aside for future pension payment, he said, but instead had been used for general spending by the state budget.

“We want to stop this agreement,” he told Reuters. “It’s not good for social security and the people we are responsible (for). We don’t want to say in a crisis that we can’t stand by our obligations.”

The NII is allowed to stop transferring funds to the government as long as it gives at least three months notice before the end of the year.

Such a step — losing up to 25 billion shekels a year — would be problematic for Israel’s fiscal policies. A Finance Ministry source said the budget deficit would swell by some 1.7 percentage points a year to close to 5 percent.

“It will hurt our credit rating and our ability to raise debt,” the source said, noting it would lose nearly 10 percent of its spending. “We will have to close some services and do some real downsizing of welfare, education and infrastructure.”

The ministry believes the NII’s step is mainly to become more independent without having to answer to the government on the level of entitlements to the elderly.

At the same time, it is not clear how the NII will invest the funds. Currently, the government invests the NII’s surplus in bonds — half of which return 5.5 percent while the other has averaged a return of 4.2 percent the past decade and accounts for about 20 billion of the surplus.

Shpigler insisted he can get a higher return that will improve the agency’s financial stability and plans to set up a committee to decide how to invest.

The NII has the support from Haim Katz, Israel’s welfare and social services minister, who sent a letter to Prime Minister Benjamin Netanyahu saying that some decisions taken by the Finance Ministry raise concerns over the NII’s long-term existence.

To make the NII more independent and to prevent “use of social security funds to finance current government expenses,” Katz said he would not renew the agreement with the government.

Netanyahu’s office declined to comment.

Reporting by Steven Scheer; Editing by Richard Balmforth

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