The US example could point the way forward for Israel's ailing National Insurance Institute.

It probably comes as no surprise that Israel's National Insurance Institute (NII) received a failing grade on its report card. What is surprising, however, is just how bad things really are at the NII. Two independent accounting firms recently called the books of the NII "a wasteland". The Ombudsman report revealed that the NII has a rate of job placement of only 3.7%, and that it leads all government institutions in the number of complaints received by the public. Considering that the NIIs budget is approximately 10% of Israel's GDP, it seems pretty clear that not only are welfare recipients being victimized by an ineffective and unpleasant public welfare agency, so are Israeli taxpayers.

The extreme failure of a government welfare agency like the NII is not new, nor is it specific to Israel. The US was similarly ineffective in delivering welfare services for many years. But in the US, an innovative solution to welfare mismanagement was eventually discovered and successfully implemented. The solution was found in the privatization of welfare provision. Minimal government involvement combined with the creation of a competitive market in the delivery of welfare services has led to higher rates of job placement at substantially lower social costs.

Cheaper and better

The poor results of state welfare agencies, a growing interest in performance-based management techniques, and the adoption of the work first initiative in the US, spurred the utilization of private welfare providers during the 1990s. According to the US General Accounting Office, the first work initiative, also known as Temporary Assistance to Needy Families (TANF), has now been either partly or wholly outsourced in almost every one of the 50 states.

Among the functions of TANF that have been privatized are case management, employment services, support services like childcare and transportation, and specialized services including mental health and substance abuse treatment. Private providers of these services are both for-profit firms as well as nation-wide and community-based nonprofit organizations. There is a consensus in the US that the contracting out of social services has lowered the cost of welfare provision at the same time that it has improved its quality.

As a particular example of how the privatization of welfare works, consider the case of New York City. A private firm, called America Works of New York City, Inc., charges New York State a flat fee of $5,000 when it places a welfare recipient in paid employment for at least seven months. It previously cost the State of New York close to $24,000 to achieve the same goal. The privatization of welfare services in this case has saved the State of New York more than $18,000 per welfare recipient. Another success story is in Washington DC. A private company, called Washington Works, has managed to keep 87% of its clients off the welfare roles for more than a year (for more details see www.ncpa.org).

So why is it that private welfare agencies like America Works of New York City and Washington Works perform substantially better than public welfare agencies? The main reasons are that the payments received by these entities are directly linked to their performance, and there is competition for government contracts based on cost and quality of service. The role of government in this framework is concentrated on and limited to the technical evaluation of contractor bids and the strict monitoring of contractor performance.

Encouraging giving

Private nonprofit organizations are also active providers of welfare services in the US. Nonprofits generally do a much better job than public welfare agencies because they are not burdened by stringent rules that lead to arbitrariness deciding who is entitled to benefits. Public employees have little incentive to distinguish between people who really need assistance and those who play the system. Employees of nonprofits usually have local knowledge and conviction that more effectively benefit the truly needy.

Unfortunately, a major obstacle to the growth of these types of nonprofits in Israel is current Israeli tax law. Only 35% of charitable gifts above $82 per year are tax-deductible. In the US, all charitable gifts are 100% tax-deductible. Further, many nonprofits in Israel are not able to obtain tax-exempt status at all. Donations made to these latter organizations are, therefore, 0% tax-deductible. Professor Eliezer D. Jaffe of Hebrew University found that, in 1998, only 11% of nonprofit organizations with “amuta” status succeeded in obtaining tax-exempt status for their donors.

It is interesting that even under these terribly unfavorable conditions for charitable giving, Israelis donate a significant amount of money. A study conducted in 1997 at Ben-Gurion University's Center for Third Sector Research shows that 77% of all Israeli adults contribute to charity, with an average annual donation per household of $260. Of course, if the costs of giving in Israel were to be lowered, charitable contributions would increase, enabling nonprofits to offer more welfare services.

Although offering more significant tax breaks would lead to diminished tax receipts in the short run, as private philanthropy developed, the government would be able to significantly cut funding to the NII. In the long run, public expenditures would decrease by more than the decrease in tax revenues, and welfare services would improve. The Israeli government should, therefore, increase the extent of tax-deductibility of charitable donations and stop crowding out more effective private welfare provision.

In light of the recent reviews of the NIIs less than admirable performance, the time has come for Israel to learn from its mistakes and from the successful welfare reforms implemented by others. The Israeli government should get out of the business of welfare provision to the maximum extent possible. Our politicians should work harder to create the conditions necessary for a competitive market in welfare services to flourish. It would also be wise for our policy makers to reform current tax laws in order to more significantly encourage voluntary charitable contributions to nonprofit organizations that are better at lifting the poor out of poverty.