The Pension System in Indonesia

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The Pension System in Indonesia

• Extending Pension Coverage to Informal Sector
  Workers
• The Asian Challenge
• November 30 December 1, 2006
• P.S. Srinivas
• Lead Financial Economist
• Finance Private Sector Development
• The World Bank, Jakarta, Indonesia

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Indonesias workforce is largely informal

Source Central Bureau of Statistics
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and based in agriculture, trade, services
Source Central Bureau of Statistics
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Indonesias population will age faster in the
next decades.
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2000 Population Age Pyramid
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2050 Population Age Pyramid -UN Projections
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Summary of Pension Landscape (1)

• Current schemes focus on civil servants and
  formal sector workers
• No coverage for informal sector and self employed
• Targeted social safety net programs
• Commodity price subsidies and transfers
• Low coverage
• Population 220 million
• Total workforce 105 million
• Pension/provident funds - 18 million (15 of
  work force)
• Health insurance 17 million (public)
• lt 10 of population
• lt15 including private health insurance
• All mandatory social security institutions are
  state owned enterprises
• In principle all owned by Ministry of State Owned
  Enterprises
• Employer-based voluntary pension funds are
  privately managed
• In practice, fragmented system
• Different ministries operationally responsible
  for different systems
• Varying degrees of regulatory and supervisory
  capacity
• Poor coordination between ministries
• No overall idea of extent of contingent
  liabilities imposed on state

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Summary of Landscape (2)

• Governance
• Weak
• Overall, current system suffers from several
  deficiencies
• Does not provide a sound social safety net to the
  vast majority of workers
• Private sector system does not provide adequate
  level of old-age benefits
• Civil servants and armed forces systems will
  impose increasing fiscal costs in near future
• Does not encourage labor market flexibility
• Does not contribute to financial sector
  strengthening

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Recent Steps at Reform

• Objective Provide comprehensive social security
  coverage to all Indonesians
• Law enacted in October 2004
• Implementation just beginning
• In the long run, replace current programs
  JAMSOSTEK, ASABRI, and TASPEN
• Coverall workers formal, informal,
  self-employed
• Mandatory participation and contribution from
  employers and employees
• Includes social assistance scheme for poor
  Indonesians
• Governed by a tripartite board of government,
  employers and workers
• Day-to-day management (for now) to be in hands of
  existing institutions
• New institution to be created for informal
  sector/self employed workers
• No/limited role for private providers
• Defined benefit pension scheme
• Comprehensive health insurance program

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Key Concerns

• Little recognition of extent of liabilities of
  existing programs
• Defined benefit program against prevalent
  international practice
• Demonstrated weaknesses in regulation and
  supervision
• No details on contributions/benefits structures
  yet available
• Consolidation of asset management with benefits
  administration
• No/limited opening to competition or outsourcing
• Role of sub-national governments not integrated
• Static normal retirement age
• Specifications left to implementing regulations
  yet to be framed
• Potential adverse labor market impact
• Reduction in employment and/or take-home pay
• Indonesia already suffers from weak investment
  climate
• No actuarial calculations to estimate
  contributions/benefits relationship
• No estimates of likely fiscal costs

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Some illustrative estimates on impacts of the new
social security system

• Different sets of assumptions used on
• Demography (fertility rates, etc.)
• Retirement age
• Benefit levels
• Management performance (collection rates,
  investment returns, administrative
  costs/benefits, etc.)
• Workforce
• Macroeconomic trends

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Full Funding Asset Reserves as of GDP All
Scenarios
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