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 large wage subsidy for recipients of income maintenance.

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