Why did Bituach Leumi decide to give Israeli children free money?
Douglas Goldstein, CFP®, a licensed investment advisor who helps people meet their savings goals, speaks with Professor John Gal, chair of the Social Welfare Policy program at the Taub Center, about the program to alleviate child poverty. Professor Gal discusses how the program works and whether it will be successful in giving children a head start in life. Will the new program encourage increased savings?
For an article about the tax implications of the Bituach Leumi program for U.S. citizens, click here.
To read an article, written by Professor Gal, about the savings accounts, click here.
Follow the work of the Taub Center at taubcenter.org.il and on Twitter @TaubCenter
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Roger Whitney, the Retirement Answer Man, co-hosts this episode of The Goldstein on Gelt Show. Find out why some people prefer to bet in a casino, where the odds are stacked in favor of the house, rather than putting their money into the stock market, where historically chances of making a profit are much higher. Can you really make successful financial decisions based on chance?
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Read the Transcript
Interview with Professor John Gal
Douglas Goldstein interviews John Gal, the Chair of the Social Welfare Policy Program at the Taub Center. Find out why John Gal believes that the Bituach Leumi child savings plan is a great program to deal with poverty, and one that will change generations to come.
Douglas Goldstein: I am very excited to have on The Goldstein On Gelt Show Professor John Gal. He is the Chair of the Social Welfare Policy Program at the Taub Center. He's also at the School of Social Work and Social Welfare at Hebrew University, where he has served as the dean. I wanted to bring him on to talk about this new program where Bituach Leumi is giving money to children, just straight out giving it to them. John, explain to us what's going on here.
The New Bituach Leumi Program and What's Its All About
John Gal: The idea originated in the United States. It's part of a notion of asset-building where the idea is that you enable people, in this case children. When they become young adults and build up their assets, they can then go to university, go to college, or begin a business.
Douglas Goldstein: You said this was based on something in the United States? What's it based on here?
John Gal: It was based on an idea by a professor at Washington University, Michael Sherraden, and in fact it's been introduced in a number of places, both in the United States and in a number of countries around the world, over the last 20 years. There's a very big program in Oklahoma. I also think that in New York City, the mayor introduced a similar program only a few weeks ago. There is a very major program based on this idea in Singapore, in Taiwan, in South Korea, and even in China. We've based this program in Israel on evidence and cross-national learning in other countries.
Douglas Goldstein: I see. What's the idea though? The idea is you just keep putting money into an account for kids, a relatively small amount of money, and then when they hit 18 or 21, they have access to it?
John Gal: That's exactly the idea. Basically we're saying to parents, "We want to encourage you to save money for your kids. To that end, the government gives you NIS 50, which is, I suppose, the equivalent of about $12, a month. You put this in a savings account that's only intended for the child, and they will receive that money at the age of either 18 or 21. They'll basically be able to do whatever they like with that money.
The parents can also add an additional NIS 50 into that account. The money will be saved by a bank or by a financial company. The government will cover the cost of saving the money, and the parents or the child will receive the funds and the interest on that money when they reach the age of 18 or 21.
Douglas Goldstein: Isn't this teaching the wrong lesson to people? Ultimately we want to raise children who can work and save on their own when they become grown-ups. Instead of teaching people this lesson, we're really just gifting them money. It's also teaching the lesson that, don't worry, you can count on the government. It will give you money over time.
John Gal: The message is that you want to encourage families, parents, and children, particularly in poor families, that saving is a good idea. That saving for their future could be something that they want to do and can help them when they need the money later on as adults.
Douglas Goldstein: But they're not saving. They're being given the money. Saving means you work and you put something aside.
John Gal: The hope is that parents will not only use these NIS 50 but they'll also use another NIS 50 of their money to save for their kids. So it is in fact a savings account and not necessarily money that the government is giving to parents, and they then decide what to do with that money. The money is for children beginning life when they become adults.
Douglas Goldstein: I just want to go back to this issue that we were discussing. Already the government is giving money to people who have children. Why not augment that program rather than create a brand new program, which is going to be something new to manage and oversee, and frankly, is complex for people?
Why Can't The Bituach Leumi Program Be Augmented?
John Gal: I don't know how complex it will be. They have to make one decision, and that will more or less determine whatever happens to that money for the next 20 years or so. But in fact the idea here is to deal with poverty - long-term poverty - and to try to deal with the next generation and try to prevent poverty in the next generation.
You are right in the sense that ideally, what the government should be doing is providing more funding for poor parents today, to enable them to provide better lives for their kids today. Also, to help them save money for their kids so that when they're young adults, they'll have these assets to begin their lives. That was also the recommendation of a committee established by the government to combat poverty. That committee recommended both raising child allowances and introducing this, what we call a “child development account program.”
Douglas Goldstein: I don't understand why we need another program.
John Gal: Let's look at the facts. In Israel, 20% of families live below the poverty line. This has been more or less stable for the last 15 years. There are different reasons for poverty. Some are demographic reasons. Some are connected to the labor market, but they're also connected to policy, and Israeli policy doesn't really enable us to deal very effectively with poverty today or in the future.
Essentially, what this program is doing is trying to increase the assets of people in Israel, particularly poor families. That's not enough. We have to deal with poverty in other ways.
Douglas Goldstein: But everyone gets the money, not just people in poverty, right?
John Gal: That's because it's a universal program. What we've learned - and I think what people have learned in other countries - is that if you have programs that help the poor and people with low incomes get money, it's a much simpler way of dealing with social policy.
Douglas Goldstein: Listen, if you're telling me that 20% of Israelis are living in poverty, then that means that 80% of the money going into the program is going to families who have money. In other words, instead of helping the people, it's costing four times the amount that it would cost because we're giving it to all these other people who really don't need the money.
John Gal: It's not 80% because about a third of all children live in poverty. What you're saying is that 2/3 of the money goes to children who are not officially in poverty. Many other children live in families that are very close to the poverty line. But this is a very simple way of running a program. If we want to get money from people who have higher incomes, we can do that through the tax system.
We claw back money, we take taxes, and we should perhaps take even more taxes from people with higher incomes. By having a universal program, it means that the program is simple to administer and it gets to everybody. If we means-tested the program, we know that the take-up would be low among people living in poverty. It would be very difficult to administer, and people would not be getting the money that they deserve.
How Fair Is The New Bituach Leumi Program?
Douglas Goldstein: I have a day job and I don't need the NIS 50 a month. I'm perfectly happy to get it, but it just seems funny to me and all of my neighbors who are doing okay and most of the people I know who are doing okay, to get this money. I think there's a problem with the government trying to manage such a thing. You're saying it's fair because it's universal, but it's not. If the ultimate goal is to help people who are in poverty, it just doesn't make sense to me that we're giving it to everyone. In America, they gave food stamps but only to poor people. They didn't give it to everyone.
John Gal: America hasn't really dealt much better with it than we have with poverty, and those food stamps haven't really solved issues of poverty in the United States. On the other hand, countries which have universal programs and rely much less on means-tested benefits are much more successful in dealing with poverty. The Robin Hood principle is this idea in fables and in stories but in fact, if we really wanted to deal with poverty very successfully, we have to use universal programs much more than using means-tested programs, which in the end are just poor programs for poor people.
Douglas Goldstein: I'm a big fan of helping people and people who need charity or people who are stuck. Obviously it's a Jewish concept that goes back thousands of years, which I support to no end.
I'll tell you a funny story. My daughter, who of course is the daughter of a financial advisor, told me that in her high school not a single girl in her class knew how checkbooks worked except her. This was very funny to me, because the kids were learning all sorts of things that don't really make a difference to them but no one was bothering to teach them the basics of personal finance.
It feels to me like the program, and so many other programs out there are just Robin Hood systems where money is given to people, or they just gift money, or they tax the rich and give it to the poor. They're not helping people get out of a system, a, because it's so little money, and b, because they're not giving them the education that they need to really manage their money.
I would encourage the government to teach people how to be financially independent. We need to help people who are desperate. But most people are not desperate. Most people just don't know how to handle money.
John Gal: Firstly, financial education is part of this program, and the idea is to increase financial education in the school system and so forth. We know that it's not enough to teach people how to use the money they have. If they don't have enough money nothing's going to help them get out of poverty. No amount of financial education will help them get out of poverty.
The fact is that people living in poverty in Israel, and the United States for that matter, just don't have enough money because the labor market doesn't provide them with enough income. It could also be because they don't have access to good education for their kids or for decent housing. If we really want to deal with poverty, we have to use diverse programs; some universal, some more selected, means-based, trying to deal with poverty today in the present but also in the future.
This is one component. I think a universal program would make sure that every single poor family and other people will get these benefits. We used to have means-tested child benefits before, and they weren't effective because poor people didn't get the same as other means-tested programs. I'm not against means-tested programs, but that's not a very successful way to deal with poverty or certainly not the only way.
Douglas Goldstein: You said that it's not complex. Probably most of the listeners to this show, The Goldstein On Gelt Show, are Americans who live in Israel. They are finding that they have two options. There's a mutual fund option and a bank savings program. But because of the taxation that the IRS, the U.S. tax authority, imposes on Americans, American citizens who have made Aliya can't choose the mutual fund because of the adverse tax consequences. Is there going to be a fix to this or is this it that they're out of luck?
John Gal: I know that there are two options. Basically, you can choose a number of options both within the mutual fund and in the bank option. The bank option is more conservative and their interest rates would be lower, but that's the first time I've heard that there's an issue with the IRS, and I really don't have a good answer to that.
But just to make it clear, parents have to make one decision or even no decision, and then the money will be invested into what they choose. If they don't choose, it will be put by default into one of the bank options. It's really not complicated for either the parents or for the government and in that sense it is really relatively easy. I don't know about the IRS. That's a good issue.
Douglas Goldstein: How can people follow you and follow your work?
John Gal: Well on this specific issue, we brought out a policy brief at the Taub Center and our colleagues at the Center for Social Development at Washington University in St. Louis. The policy is called Child Development Accounts In Israel: A Background And Review Of Options. People that are interested in the way this policy develops may want to have a look at that.
Douglas Goldstein: We'll have a link to that in the show notes of today's show at Goldsteinongelt.com. Professor John Gal, thanks so much for taking the time.