The fiscal consequences of changing demographic composition: Aging and differential growth across Israel’s three major subpopulations

Among high-income countries, Israel has an unusual demographic profile. While averaging 1.8% growth per year in GDP per capita (constant USD) over the last 25 years, its population has been increasing by 1.9% per year. Most years, around 80% of this population growth is driven by Israel’s high fertility: the period TFR was 3.0 in 2022, almost double the OECD average. As a result, Israel’s age-structure is much younger, and its old-age dependency ratio much lower, than other high-income countries with a similar life expectancy (e.g., Italy and Spain) or a similar GDP per capita (e.g., Canada and Sweden).

In a prior paper, we describe how this young age structure alongside other idiosyncratic national characteristics—in particular, the lengthy national military service that delays entry into higher education and into the labor market—are reflected in Israel’s National Transfer Accounts (NTA) profile (Weinreb, Shraberman and Weiss 2024). Using data from 2018, we identify a number of key differences between Israel’s profile and that of other high-income countries: Israel’s substantial public expenditures on education last deeper into the lifecourse than in most high-income countries; Israelis enter the labor market relatively late, remain in it for longer, and their average labor income only comes to exceed average consumption later in life; as a share of average income, private transfers, both intrahousehold and interhousehold, are relatively high and extend over more years, deep into people’s 70s in terms of net interhousehold outflows transfers from elderly to younger generations. Finally, Israel’s lifecycle deficit as a percentage of GDP is higher than the average for high income countries, reflecting its unusual combination of substantial public expenditures,  relatively low tax revenues, unusually high public asset income relative to the OECD, and a young population whose continued growth makes saving more difficult.

This paper has two starting points. The first is the anticipated compositional shifts within Israel’s population that will alter the balance within its “generational economy” across three core groups or subpopulations, each of which has distinct demographic and socioeconomic profile: Haredim (ultraorthodox) Jews, who currently constitute about 12.5% of the total population[1]; Arabs, comprizing about 21% of the population; and the remaining general population that is mostly composed of non-Haredi Jews but also includes more than 500,000 people who are categorized as being neither Jewish, according to religious Jewish law, nor Arab. The second starting point is the rapid growth of Israel’s elderly population, in general, and its differential growth patterns across the three core subpopulations, in particular. Both the compositional shifts and the rapid growth in the elderly population will occur as Israel’s population is projected to grow from 9.7 million in mid-2022 to 15.9 million in 2050 (Israel Census Bureau’s medium scenario projection).