Income Maintenance Allowances in Israel — Ideal vs. Actual

22 Pages Posted: 11 Nov 2012

See all articles by Dmitri Romanov

Dmitri Romanov

Government of the State of Israel - Israel Central Bureau of Statistics

Noam Zussman

Bank of Israel

Date Written: May 1, 2004

Abstract

At the end of 2002 more than 150,000 families in Israel were receiving income maintenance allowances, about ten percent of the number of families of working age; twenty years ago about one percent of families received such support. Annual income maintenance payments amount to about 0.7 percent of Israel’s GDP.

The structure of income maintenance has hardly changed since the introduction of the system in 1982, with high offset rates against labor income and with a low income-disregard level. This structure had a negative effect on the rate of participation in the labor force and on the propensity to cheat. A reform was introduced in 2003 which among other things sharply reduced the allowances, the offset rates and the disregard-income level. In addition various programs were introduced to facilitate wider participation in the labor market by income maintenance recipients.

This paper presents a simulation of the optimal structure of the income maintenance allowances taking into consideration social preferences regarding the inequality of income distribution, labor supply elasticity and the propensity to cheat. The results of the simulation indicate that the optimal maintenance payment is higher than that determined in the reform and that the optimal offset rates against labor income are far below the current rates, and there is even room for a wage subsidy for recipients of income maintenance.

Suggested Citation

Romanov, Dmitri and Zussman, Noam, Income Maintenance Allowances in Israel — Ideal vs. Actual (May 1, 2004). Israel Economic Review, Vol. 2, No. 1, 2004. Available at SSRN: https://ssrn.com/abstract=2173989

Dmitri Romanov

Government of the State of Israel - Israel Central Bureau of Statistics ( email )

Israel

Noam Zussman (Contact Author)

Bank of Israel ( email )

P.O. Box 780
Jerusalem, 91907
Israel

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