Until 1985, the Israeli economy was almost socialist, with strong state intervention that brought it to the brink of economic collapse. Between 1980 and 1984, the fiscal deficit soared to 13.2% of GDP and annual inflation reached a record of 400%.

 

Starting in 1985, the Ministry of Finance, in agreement with the main political parties, led a stabilization program that incorporated structural changes in the Israeli economy, especially a new individual capitalization system for pensions that would replace the broken and unfair pay-as-you-go system.

 

The profound changes toward economic freedom were led by outstanding officials from the Ministry of Finance and the Bank of Israel. Very influential and experienced politicians from both parties also participated in designing the program. The successful Chilean example of creating an individual capitalization system for pensions was decisive.

 

The main objectives of introducing a capitalization system were to stabilize fiscal accounts and develop a powerful capital market, as well as increase social coverage and reduce poverty. Also, to transform a deficit system that promised benefits into one capitalized based on defined contributions in which workers' funds are invested in the capital market.

 

Like Chile, Israel closed the door to new workers joining the pay-as-you-go system. Social security coverage increased from 35% in 2009, with the pay-as-you-go regime, to 78.2% in 2018, with the capitalization system. The total contribution to the capitalization and unemployment system reaches 20.5% of remuneration. Upon retirement, workers can withdraw in one lump sum the capital amount that exceeds a minimum pension.

 

Pension funds managed by the private sector reach 400 billion dollars, surpassing GDP which in 2019 reached 371 billion dollars. Between 2001 and 2019, the average real return reached 6.04% annually. Fees have decreased from 1.1% in 2005 to 0.5% in 2018, thanks to tenders similar to the Chilean system through which young people entering the workforce join an administrator that won that segment through a public tender in which it offered the lowest market fee.

 

Israeli society values the capitalization system for pensions for its security, profitability, and transparency. A key role in this is played by the fact that Israelis are educated from a very early age in saving and investing, that is, in financial education.

 

In the last 30 years, Israel's economic results are impressive. GDP per person increased more than three times, from 12,500 dollars in 1990 to 41,700 dollars in 2018. Public debt fell from 138% of GDP to 61%. Economic freedom led Israel to development, turned it into an export powerhouse, and elevated the country to the rank of world leader in technological innovation.