Israel's Finance Ministry Proposes Cuts to Pension Tax Exemptions to Address Budget Deficit
In a strategic move to combat its growing budget deficit, the Israeli Ministry of Finance has announced plans to reduce tax exemptions on pensions. This decision comes amid increasing military expenditures and heightened tensions on the Lebanese front, following a year-long conflict that originated in the Gaza Strip. The ministry aims to lower the deficit to 4% by 2025, despite ongoing military spending.
The Israeli economic publication, Globes, reported that the ministry is considering imposing taxes on advanced training funds, which have previously been exempt from taxation. This initiative is part of a broader series of measures aimed at stabilizing the economy as military confrontations escalate. The Finance Ministry argues that the changes will promote long-term savings through pension funds, which currently benefit from substantial tax exemptions totaling approximately 24 billion shekels ($6.5 billion) annually.
Changes to Pension Tax Exemptions and Their Impact on Retirees
Currently, pension savings enjoy various tax exemptions during both the accumulation and withdrawal phases. For 2024, 52% of the monthly pension payment (up to NIS 9,430, or $2,546) will be exempt from income tax. However, the Finance Ministry is seeking to retract an increase in this exemption from 52% to 67% scheduled for 2025. This rollback could significantly impact retirees, with expert Ron Keshet estimating that those with monthly pensions of NIS 10,000 ($2,700) could face an additional tax burden of NIS 192 ($52) monthly, translating to NIS 2,298 ($620) annually.
For individuals receiving pensions between NIS 20,000 and NIS 45,000 ($5,401 and $12,153), the additional tax could reach NIS 5,746 ($1,552) per year. Keshet warns that
Potential Economic Consequences and Union Response
The Finance Ministry anticipates that these cuts could generate an additional NIS 400 million ($108 million) starting in 2025. However, the proposal has already faced opposition from labor unions, particularly the head of the Histadrut, Arnon Bar-David, who has vowed to resist any reduction in pension tax benefits. The Finance Ministry has attempted to cut pension benefits in the past without success, raising questions about whether this proposal is a genuine policy change or merely a tactic in negotiations with the Histadrut regarding other issues, such as public sector wage freezes.
As the Israeli government navigates its economic challenges, the proposed changes to pension tax exemptions highlight the delicate balance between fiscal responsibility and the welfare of retirees. Stakeholders are closely monitoring the situation as discussions continue.
