The Bank of Israel is publishing its semi-annual “Selected Research Analyses” today.  The collection includes five short papers, four of which were already published in recent weeks:

  1.         An analysis of the gender gaps in basic skills in the labor market and their contribution to explaining the wage gap between men and women;
  2.         An examination of the development of electricity production from renewable energy sources in Israel, which lead to missing the government targets in this area and barriers to future progress;
  3.         An analysis of the causes of the gap between the development of the GDP deflator and the Consumer Price Index, and an examination of the effect of this gap on the main macroeconomic aggregates;
  4.         An examination of the precision of various estimates of inflation expectations.

The fifth paper, written by Maya Haran-Rosen, deals with changes in the risk distribution mechanism in the new pension funds in Israel and their effect on the intergenerational subsidy.


Changes in the risk distribution mechanism in the new pension funds in Israel, and their effect on the intergenerational subsidy – Segment from the forthcoming Fiscal Survey and Selected Research Analyses



  •        The changes made in the pension funds are reducing the intergenerational distribution of risk, since in recent years it has created actuarial deficits (basically an intergenerational subsidy) due to how the yield and the interest rate are set.
  •        The new mechanism imposes a larger part of the risk deriving from yield volatility on pensioners.  Alongside this, their assets’ exposure to market risk has been mitigated by the redistribution of earmarked bonds, since pensioners are now entitled to invest 60 percent of their assets in such bonds, while they were allowed to invest only 30 percent previously.
  •       Had it not been for these changes, the actuarial deficit and intergenerational subsidy would have continued to increase with the rise in  pensioners’ assets, but the Capital Market, Insurance and Savings Authority dealt with the existing distortion in a timely manner.
  •        Even though the new mechanism reduces risks, additional measures can be considered and alternative mechanisms used to distribute market risks across generations in order to increase social well-being—meaning to reduce the potential shocks to pensioners’ old-age benefits in exchange for increasing the potential yield on the assets of younger savers.
  •        Examples of additions that can increase social well-being are changes that increase the intergenerational distribution of risk while cancelling the use of arbitrary assumptions, and transitioning to automatically set, market founded assumptions.  In addition, changes can be made that would increase the intra-generational distribution of risk among pensioners, in order to avoid placing the entire risk on younger savers.