The Organisation for Economic Cooperation and Development said Sunday that while Israel enjoys rapid economic growth and low unemployment it has the worst poverty of the group's 35 member states.
"Israel's output growth remains relatively strong, unemployment is at historically low levels, its high-tech sector continues to attract international admiration, and new offshore gas fields have come on stream," the OECD said in its 2013 Israel Economic Survey.
"However, average living standards remain well below those of top-ranking OECD countries, the rate of relative poverty is the highest in the OECD area and there are ongoing environmental challenges," it said.
The 111-page report was presented Sunday by Israeli Finance Minister Yair Lapid and OECD Secretary-General Angel Gurria.
"The incomes of about one in five Israeli households fall below the (relative) poverty line," the report said.
"Among Arabs and in the rapidly growing ultra-Orthodox (hareidi) Jewish community poverty is over one in two, mainly due to low employment rates among Arab women and ultra-Orthodox men."
It said that while Israel met or exceeded the OECD average by several measures, it was below average in "social connections, housing, education and skills, work-life balance, personal security, environmental quality and civic engagement."
The latest report recommended boosting educational levels - singling out the underperforming Israeli Arab and hareidi Jewish communities for attention - and overhauling welfare systems.
"Ensure health and pension systems are able to cope with ageing," it said, calling for the reform of pension taxes, increasing the retirement age for women and simplifying procedures for long-term care.
It also urged the government to "move quickly to introduce a nationwide welfare-to-work programme" and reform disability benefits.
The OECD said higher sales taxes would be a better source of revenue than income tax hikes, a suggestion sure to be unpopular with lower and middle income families who already say they shoulder a disproportionate share of the burden.
The report come on the same day as figures were released by the Bank of Israel showing Israel as ranking 26th out of 32 OECD countries regarding government spending as a percent of national spending.