Investing in the future – Israel’s approach to social welfare
Author: Taub Center Staff Bulletin Articles

In the past decade, welfare state scholars have begun to distinguish between welfare programs providing “social protection” (e.g., income support and old age pensions) and those focused on “social investment” (i.e., development of individuals’ abilities and skills so they can better integrate into the labor market).

Israel has been putting more of an emphasis in recent years on social investment; that is, there appears to be a government effort to increase its focus on enhancing human capital over programs intended to address social distress and deprivation.

Israel’s preference for social investment programs can be seen from its spending patterns. Though Israel’s overall level of social expenditure is low compared to other welfare states, its share of expenditure on social investment within this spending is relatively high and similar to the share in social democratic welfare states like Sweden and Denmark.

Expenditure on social investment, social protection and other spending

A main objective of any welfare state is to reduce the incidence of poverty among its citizens. Israel’s poverty rate before transfer payments and taxes (in terms of market income) stands at 23% and is lower than the average for other OECD countries (28% on average).

However, when the poverty rate is examined in terms of disposable income – what people actually have in their pocket after taxes and transfer payments – Israel tops the chart at a poverty rate of 18%, versus an average of 12% in other welfare states.

Even when taking the elderly out of the picture and looking only at the working-age population, poverty in terms of disposable income is significantly higher in Israel than in other welfare states. One reason for this is that poor households with a working-age head of household in Israel are much larger in size than similar households in other developed countries and, therefore, the amount of income and/or assistance required to lift such a family out of poverty is much larger.

Another explanation is that among the working-age population, the generosity of social protection programs like income support and child benefits is limited. Despite a rise in the average monthly wage and in the poverty line over the past decade, the sum total of these two benefits (in real terms) has remained stable, and its distance from the poverty line has increased, thus limiting their capacity to assist people living in poverty.

This may indicate a concern among policy makers in Israel that overly generous benefits for families with a working-age head of household may serve as a disincentive to labor force participation.

Income support and child allowance relative to the average wage and poverty line

Instead of focusing on the social protection programs described above, Israel has witnessed an expansion in recent years of programs that invest in future skills or capabilities, including the Saving for Every Child program and the expansion of daycare services.

The Saving for Every Child program, which was launched at the beginning of 2017, ensures that a lump sum of money will be available to every child in Israel at the beginning of their adult life. From birth, an amount of NIS 51 is deposited monthly into the child’s account, and this money becomes available to the child at the age of 18 or 21. Thus, the program does not provide immediate assistance to poor families, but rather ensures that even children from poor families begin their adult lives with some savings.

Nonetheless the program’s effectiveness at reducing the incidence of poverty and enabling social mobility – a main goal of the welfare state, as mentioned above – has been called into question by some experts because of the specific characteristics of the program.

Every Israeli child, rich or poor, receives this money. The parents of the child have the option of choosing the investment channel for the money, whether in a bank (lower risk, but provides lower expected returns)­ or a provident fund (higher risk, but returns are expected to be greater). Parents also have the possibility of matching the amount through an automatic deduction from their universal child allowance.

In reality, less than a third of parents in the lowest income quintile add money to the state contribution, versus 65% of parents in the highest quintile, who also choose to put the money in the higher-yield provident funds. Thus, it appears that children from well-off families are benefiting more from the program than children from lower-income families, which could inhibit social mobility.

Daycare services for young children, another major component of Israel’s social investment welfare policy, have expanded since the 2011 social protests. Nonetheless, the conditions of eligibility for subsidization of daycare, which is limited to working mothers, and the limited supply of daycare centers leads to a restricted and differential accessibility to daycare.

This is reflected in the large differences in daycare users across Israel’s various population groups: only 8% of Arab Israeli households with children of the relevant ages use daycare services, while the rate is 16% among the non-Haredi Jewish population and 41% among Haredim.

Does the Saving for Every Child program increase social mobility? Are daycare services reaching all of Israel’s population groups? Israel’s welfare officials will need to contend with these challenges as they continue to shape Israel’s welfare system and its commitment to social investment policies.