Lawmakers aim to give parents greater control over their children’s savings plans
New legislation would allow funds granted by the government’s ‘Savings Plan for Every Child’ program to be transferred from banks to more profitable deferred savings options
Sam Sokol is the Times of Israel's political correspondent. He was previously a reporter for the Jerusalem Post, Jewish Telegraphic Agency and Haaretz. He is the author of "Putin’s Hybrid War and the Jews"
In a move that could potentially end up paying dividends of tens of thousands of shekels for Israeli families in the coming years, the Knesset Finance Committee on Wednesday voted to advance legislation overhauling the structure of one of the government’s key child benefit programs.
The bill, authored by Shas MK Yinon Azoulay, aims to give parents greater flexibility in how their monthly payments under the National Insurance Institute’s “Savings Plan for Every Child” are invested, giving them a choice between placing the money in a low-interest bank savings plan and more profitable kupat gemel — a deferred savings plan.
Under the program, the government sets aside a grant of NIS 57 ($15) per month for every child.
At age 18, a further NIS 500 ($133) grant is deposited and the amount accrued becomes available for withdrawal. If the young adult waits until age 21 to access the funds, the government adds a further NIS 500.
Until now, parents have been required to choose between a bank plan and kupat gemel after the birth of their first child, without the ability to switch afterwards — and any subsequent children have been enrolled by default in the same savings track.
“If the money goes in the bank, then the bank gives minimal interest, just a fraction of a percent,” Rachel Gur, the director of public policy for Lobby 99, an advocacy group that worked on the legislation with Azoulay, told The Times of Israel.
According to Gur, “if you factor in inflation then you’re actually losing money — as opposed to mutual funds which grow exponentially over 21 years.”
Lobby 99 says that those investing in deferred savings plans can earn up to three times as much as those who place their monthly benefits in banks.
Generally, those who have chosen the bank route “are people with less financial orientation or who are more risk averse, which tend to be the poorer segments of society” like the ultra-Orthodox, Arabs and new immigrants, Gur explained — arguing that this helps to perpetuate socioeconomic inequality over the generations.
The banks, she argued, “are making a huge amount of money by diluting the savings of the poorest children in Israel,” while children were “getting stuck because of a mistake you made a decade ago.”
If the bill is approved in the second and third readings necessary to become law, the change will take effect on January 1, 2025, “and the banks [will] no longer [be able to] exploit large families,” Gur said.
The new bill would make a kupat gemel the default if parents do not make an active choice in the matter, something Azoulay said he promoted because of his “less successful personal experience” in having his children’s funds deposited in banks.
Under the new law, “those who want banks have to take an active step,” he said in a statement.
The bill drew criticism from the Association of Banks in Israel, whose director of research, Gali Caspari, told the committee that “all products and all options should be on the shelf, so that a parent can choose the option that suits them.”
The proposal violates the “most basic foundations” of banking and when parents choose the bank track, the banks start “from the assumption that the payments will continue for 18 years,” she said — adding that “the interest rate today is a very attractive interest rate… not the interest rates that there were two or three years ago.”
“This is great news for all parents” who benefit from the Savings Plan for Every Child program, Azoulay told The Times of Israel, adding that from now on parents will be able to wring the maximum benefit out of the higher-risk deferred savings plan, until their children reach the age of 18-21.
A representative of the Budget Division went even further than Azoulay, saying that the Finance Ministry’s position is that the banks should not be a part of the program at all.
Despite lawmakers’ preference for deferred savings plans, going that route could pose a dilemma for dual US-Israeli citizens due to the fact that it could potentially expose them to double taxation.
Israel’s kupot gemel are considered by the US Internal Revenue Service (IRS) as a PFIC (Passive Foreign Investment Company) and are thus subject to PFIC rules for reporting and taxes.
Israel charges taxes on these kupot gemel only at termination of the funds, so “Israel may not recognize earlier taxes paid, leading to the potential of a double taxation issue for these citizens with dual US-Israeli citizenship,” US-Israeli financial planner Ira Hauser warned ahead of the program’s 2017 launch.
At present this issue only affects US-Israeli dual citizens and not other dual citizens living in Israel, as the US is the only country in the world that taxes its citizens’ worldwide income no matter where they reside, Hauser said.
Shoshanna Solomon contributed to this report.
