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pp. 40/2004) on 19 October Indonesia. 1 . 23. I. A p r i l 2 0 0 6 © 2006 ISEAS 05 Arifianto 57 4/21/06. Also. N o . ASEAN Economic Bulletin Vol. or by the Presidential Decree (Kepres) No. Health. Introduction Soekarnoputri signed it. A better policy would be to strengthen the family support system. both in the formal and informal sector. A task force appointed On 28 September 2004. Social Affairs. such as a worsening of Indonesia’s labour market conditions. pension reform. The members of the task force Security System (Undang-Undang Sistem Jaminan were representatives of sectoral ministries Sosial Nasional. The paper attempts to critically analyse the law and to predict its possible impacts on Indonesian workers and economy in general. or SJSN). 22/2002. Indonesia. The law became a concerned with social security provision in public law (Law No. and added pressures on the state budget. In addition. DPR) endorsed the law on the National Social drafted the law. the Indonesian House of through the Vice-President’s Office. However. 1 (2006).1355/ae23-1e The New Indonesian Social Security Law A Blessing or Curse for Indonesians? Alex Arifianto The Indonesian Government has recently passed a new national social security law. such as the Ministries of Social Welfare 2004. first created Representatives (Dewan Perwakilan Rakyat. From this analysis. we can conclude that there are several serious flaws in the government plan as outlined in the new law. Indonesia should seriously consider adopting a social security scheme based on the widely used multipillar approach to replace the current public social security monopoly. which has been the major source of old-age support for elderly Indonesians. 2 3 . 9:57 AM . it does not allow competition in the provision of social security benefits to Indonesians. No. ageing. ASEAN Economic Bulletin 57 Vo l . which supporters have said would make the existing social system works better for the beneficiaries and would extend social security coverage to more workers and their families. opponents have stated that the new law is flawed in many ways. financial unsustainability. Keywords: social security. Manpower. 57–74 ISSN 0217-4472 print / ISSN 1793-2831 electronic DOI: 10. after outgoing President Megawati (Kesra).

as would (keluarga berencana) programme. conditions for Indonesians and longer life and the poor. p. included in the drafting team. Section III describes major employers’ associations and labour unions were provisions of the social security law in detail. the paper takes a closer look at the The key feature of the new law is that it retirement benefit provisions under the new law. 40/2004 was aged 60 years and above has increased from 4. — including employers’ associations.5 does not take into account the traditional family children and their parents (United Nations 1999). particularly those who are working in the informal economy. While in the early 1950s implementation problematic. Section II describes the current Indonesians over 60 years old (ADB 2004. rapid rate. and how it would create serious problems by a payroll tax imposed on workers’ wages. the unemployed. the law Indonesian family consisted of approximately 2. and death benefits for survivors of Indonesian workers instead of improving their deceased workers. but would eventually cover all in Indonesia Indonesian citizens. health. The country’s life expectancy has While it is assumed that many parties would increased dramatically during the last three welcome the coverage of social security benefits. decades. In addition.34 The remainder of this paper is divided into the per cent of the population will comprise of elderly following sections. the law For more than three decades. Indeed. No support and through formal channels (mainly the representatives from stakeholders such as government). Current Social Security Arrangements Jamsostek). or II. labour During the past three decades. social security arrangements available for This trend will continue for the forseeable future. the new law reduced the number of children born into typical contains several serious flaws that would make its Indonesian families. (Taspen and Askes schemes) and private formal sector workers (Jaminan Sosial Tenaga Kerja. pension and healthcare companies. ASEAN Economic Bulletin 58 Vo l . p.97 per cent involved with the issue of social security provision in 2000 (ADB 2004. 1 . the passage of Law No. 9:57 AM .48 opposed by many stakeholders who are directly per cent of the population in 1971 to 7. from 45 in 1970 to 66 in 2004 (UNDP such as pension. Specifically. support system that has been the main provider At the same time that birth rate has declined. Indonesia has made mandates that within the next two to three decades significant progress in its economic and human social security coverage in Indonesia should be development. A p r i l 2 0 0 6 05 Arifianto 58 4/21/06. and also successfully implemented the family planning independent economists. old-age provisions. 47). Indonesia has unions. expectancy. 2 3 . Section VI would be expanded to cover not only civil servants concludes the paper. N o . in the 1990s the typical experts and policy-makers. Consequently. 47). policy recommendations aimed at reforming the mostly in the formal sector. to the Indonesian economy. and work injury 2003). national health insurance. the of old-age income security for most elderly number of older Indonesians has increased at a Indonesians today. The schemes would be financed welfare. This has resulted in better health expanded to the informal sector. Economic Affairs (Ekuin). Section V contains collected equally from employers and workers. Finance. which has be elaborated further in this paper. newly enacted law so that it would be in line with The passage of Law No. This is because. It explains why the retirement benefit savings. about 11. 40/2004 means that the the existing consensus on social security policy existing social security programmes in Indonesia based on international experience. It is being made the average Indonesian family consisted of six contrary to the consensus among social security children and their parents. work injury provisions would endanger the welfare of most insurance. and Indonesians today. the number of Indonesians insurance. both through traditional Development Planning (Bappenas).1 mandates the creation of several social security Section IV is a critical analysis of these schemes for citizens: old-age pension. It is estimated that by 2020.

of course. the rapid ageing of third of all Indonesians will be 55 years old or Indonesia’s population is occurring at about the older and nearly one-fifth will be 65 years or older same time the country is undergoing rapid (U.5 per cent are self-employed. There will be a greater demand where it is perceived to offer more job for old-age income support schemes as more opportunities. Census Bureau 2004). and eventually as more in the other city or country. children. amount of support they will receive from their Their only asset is often their house or land children in old age. it also means that elderly Indonesians Because of their lack of earnings. with an average income of birth rate. to a more impersonal and financially oriented due to the fact that the number of elderly system. such as nursing homes. However. 17). mostly in the informal and agriculture affect the family support system in Indonesia. most elderly Indonesians could rely services could come from the government or on the extended support of their families. p.000 (about US$55) per annum in 1999 reduced family expenditure for the support of (Hatmadji. N o . As (Hugo 1996. While they might be able to earn Indonesians are getting older. third-party institutions for their care. The increased number of the elderly parents. health expenditure as a percentage of Consequently. the likelihood of elderly in the country’s population will also children fulfilling their traditional role as their result in an increased demand for medical care parents’ caregivers in times of need is reduced and services for this sector of the population. Very little government that could only be provided by family members. hospitals and also as providers of supplemental financial and clinics. (Hatmadji and Pardede 1999). resources were allocated to assist elderly As a result of these shortcomings. while some elderly fell on their families. since it was assumed that Indonesians might enjoy adequate financial productive citizens would take care of their support. sectors (Koesoebijono and Sarwono 2003. 1 . These In the past. they will have to leave members will be living further away from their the labour force.S. Unfortunately. most of these elderly have difficulty in succeeded in significantly reducing Indonesia’s supporting themselves. Indonesia’s elderly are still active in the labour Modernization has brought many changes that force. a result. 2 3 . while 31. younger family their health deteriorates. in which assistance is given in the form of Indonesians (60 years and above) only formed cash or through hired assistants such as nurses a small percentage of Indonesia’s population. could reduce the support. A p r i l 2 0 0 6 05 Arifianto 59 4/21/06. they lack the personal care and attention aged and infirmed parents. a large number will be supported by fewer children when they of them (about 45 per cent) have to rely on family enter old age. especially those who are poor and/or Indonesian elderly increasingly have to turn to have no immediate family members to assist them. 394). 391). While this policy has resulted in Rp500. p. both profit and non-profit caregivers during the onset of health problems organizations. support for elderly Indonesians is the gross national product (GNP) could be increasingly shifting from personal care. Among other changes in the family brought The rapid ageing of Indonesia’s population about by modernization is the increased likelihood within the next two to three decades will no that younger family members who are still in the doubt create various public policy implications labour force migrating to other cities or countries. 48). both as the private sector. about one. Thus. the Indonesians. support. in which expected to increase as well. The national family planning programme has However. This. modernization and recovering from the impact of It is estimated that currently about half of all the 1997/98 Asian financial crisis. As a result. Mundiharno. major priority for the Indonesian Government. old-age policy has not been a care from their own children or family members. It is estimated that in the year 2050. 9:57 AM . and Pardede 1999. the elderly receive direct emotional and physical Historically. resources provided by these ASEAN Economic Bulletin 59 Vo l . p. for the country. p. and domestic help (Koesoebijono and Sarwono Responsibility for the care of the elderly largely 2003.

p.74 — 0. PT Jamsostek.000) for such services (ADB inadequate in many ways.74 2 9.24–1. 193). it is virtually impossible for salary. p. FIRST Initiative 2005).2 while only 15 and workers. critics of the Jamsostek scheme have 2003.24–1.24 per cent of some form of health insurance scheme provided the total wages paid to their workers. This is because the current system is billion (US$236. A World Bank study done by Leechor TABLE 1 Contributions/Premiums for the Jamsostek Programme (% of wages) Programme Employers Workers Total Workplace Accident Benefits Programme (JKK) 0.3 Retirement Benefits Programme (JHT) 3. even though this age group is benefits programme.74 (5 classes) Death Benefits Programme (JK) 0. First. 9:57 AM . and healthcare the Indonesian Social Security Law to make benefits are paid entirely by employers.24 and 11. A p r i l 2 0 0 6 05 Arifianto 60 4/21/06.3 — 0. In the 2004 state economic crisis from falling below the poverty budget. the number of workers that are actually retirement benefits are invested in the Jamsostek covered by the Jamsostek programme is provident fund managed by a state-owned abysmally low.7 Healthcare Benefits Programme (JPK) 3–6 — 3–6 Total 7. N o . more vulnerable to serious medical problems (ILO However. the government only allocated Rp21.24–13. social assistance spending stated that the existing social security system has for elderly Indonesians still receives a low priority failed to prevent those affected by the Indonesian in the government’s budget. Healthcare programme Additionally. and Thus. 93). employers and workers. while the contributions to the scheme are actually making retirement benefit premiums are shared by both contributions (ILO 2003. 99). Only about 10 per cent of Table 1 shows the specific social security Indonesians (workers and their spouses) have premiums that have to be paid by both employers some form of pension coverage. it is also estimated that Security Law (Law No.4 The previous Indonesian Social scheme. In addition. an amount that is far from sufficient informal sector workers (self-employed workers) in meeting the needs of elderly Indonesians. it does not cover 2004. This amount by either the public or the private sector3 (ILO is equal to about one month of a worker’s annual 2003). small. institutions are limited. Jamsostek does not create can be contracted out to a private provider if it adequate incentives for its members to save for can show that the benefits would be either similar retirement because the benefits received by those to or more than the benefits provided by PT who make contributions to Jamsostek are very Jamsostek (ILO 2003. In addition. 1 . death. Each employer has to make a per cent of Indonesians are currently covered by contribution of between 7. ASEAN Economic Bulletin 60 Vo l .24–11. company. and formal sector workers in small businesses The remainder of this section will describe the (with ten employees or less). This means that the government-run social security scheme for private vast majority of Indonesian workers (80 per cent social security workers commonly called of the total workforce) are not covered by this Jamsostek.5 In addition. Finally. Worker injury. 3/1992) stipulates that the only about half of the employers required by premiums for worker injury.74 SOURCE: PT Jamsostek (2001).5 line. p. 2 3 . each worker has to contribute those aged 65 years and above to receive health 2 per cent of his or her wages to the retirement insurance coverage. death.7 2 5.

and on the sanctions participating in the scheme and the general public that would be applied if the fund is being (Leechor 1996. For instance. given the lack of available found that income from such investments is schemes provided by the government to support valued cumulatively at 38 per cent below the level the needs of the elderly population and the poor of inflation and 63 per cent less than the average governance of existing publicly run social market rate (ILO 2003. such as those invested in stocks. misappropriated. 9:57 AM . the fact that the Jamsostek fund is invested mostly in banks — 80 per cent in 1997 and 86 per cent in III. in the long run it earns less than other investment As have been mentioned in Section I above. the rate of return on investments in to support elderly Indonesians is still the Jamsostek fund is also very low. it has been found that PT the new social system (popularly known as Jamsostek as the sole provider of publicly funded Jamsosnas or Jaminan Sosial Nasional) would retirement benefits in Indonesia has failed to look like. of the Jamsostek fund has not been open and The law itself is very short on the details of how transparent. the schemes. demands from this group for both old age income Another study conducted by the International support schemes and healthcare. and employers and employees have little faith in the Finance) and do not require approval from the scheme providing social protection for them. p. 2 3 . DPR passed the new Indonesian Social Security and mutual funds. outmigration to cities and other return on their investments if they put their countries and more formalized family relations retirement savings into a bank account rather than based on financial rather than personal needs). The law only states that these When we look at the level of benefits received issues would be detailed later on in government by workers covered by Jamsostek. 2003). Law on 28 September 2004. (1996) estimates that the total retirement benefits In conclusion. combined with regulations. It has been concluded changes resulting from modernization (for that these workers would earn a better rate of example. 94). A p r i l 2 0 0 6 05 Arifianto 61 4/21/06. there will be greater salary after thirty-five years of active work. Commentators attributed the lack of details fact that only about half of all employers who are within the new social security law to the pressures required to participate in the Jamsostek scheme to adopt the law before the term of the Megawati are making contributions to the scheme is government ended. which requires many testament to the low confidence of employers and compromises that could only be reached quickly employees in the Jamsostek scheme. provide financial statements and regular progress contribution rates. rules regulating how the funds reports that can be accessed by workers collected would be invested. which was signed by Finally. 90). p. 39). Unfortunately. While such an An Overview investment is considered relatively safe. 1 . The DPR. Health. critics have argued that the management outgoing President Megawati on 19 October 2004. p. This is caused by security schemes such as Jamsostek. bonds. The ILO underdeveloped. Since their valued at about 7 per cent of their final basic number is increasing rapidly. At the Jamsostek scheme. it is no wonder that most Indonesian (such as the Ministries of Manpower. Labour Organization (ILO) found that the average the traditional family support systems that these value of Jamsostek benefits only amounts to five elderly tend to rely on are increasingly becoming and a half months of their basic salary or eight and strained due to the fact that Indonesian family a half months of the current minimum wage size continues to decline and also due to other (UMR)6 (ILO 2003. N o . the state of the Indonesian received by a Jamsostek recipient at retirement is elderly is clearly at a crossroads. including on amounts of benefits. the same time. by removing contentious and debatable clauses ASEAN Economic Bulletin 61 Vo l . which in Indonesia are written the low return on investment and lack of exclusively by bureaucrats from related ministries transparency. The New Social Security Reform Law: June 1999 (Perwira et al. third-party infrastructure available In addition.

although initially associations.3 per The main provision of the law is Article 17. Employers and workers will (which manages the pension programme for those share these contributions equally. contributes. self-employed workers who A National Social Security Board (Dewan would have to register themselves. while the official Responsibilities of these agencies will include contribution rates for the different Jamsosnas ensuring workers make monthly contributions to schemes are still unknown.75 per cent of a formal sector Participants are defined as employees registered worker’s wages7 (see Table 2). PT Askes rate for the National Health Insurance programme (which manages health insurance for civil is estimated at 6 per cent (the current contribution servants). hence reducing its substantive per cent and 1. which may to the National Health Insurance programme (GOI be renewed for an additional five years. and managing the national social contribution rate. Finally. following There are no stipulations about minimum or consultation with the Coordinating Ministry of maximum amounts of benefits or contributions or Social Welfare (Kesra) (GOI 2003. From these figures. The work injury in the armed forces). and poor/ Jaminan Social Nasional. business and financially disabled persons. or DJSN) will be set up indigent citizens registered by the Indonesian to oversee the programme. programme is estimated to be around 16 per cent The National Social Security Agencies will of one’s base salary: 10 per cent for the old-age consist of the existing social security provider pension scheme and 6 per cent for the old-age agencies: PT Jamsostek (which manages the savings programme (the current contribution rate pension and health insurance programmes for for Jamsostek provident fund). Article 47). President would select the members. The contribution formal private sector employees). cent of one’s base salary). 1 . and labour unions. nominal amounts are be stipulated. 9:57 AM . and PT Asabri insurance scheme). For non-wage formal sector workers to be between 22. These companies will insurance contribution rate would be between 0. The 2004a). The government would be fifteen members. by future government regulations. Chapter IV). pp.24 continue to operate their respective programmes ASEAN Economic Bulletin 62 Vo l . we could estimate the the national social security fund. by their employer. The management of these agencies few years of operation. PT Taspen (which manages the pension rate for family coverage of Jamsostek health programme for civil servants). issuing social rates for the Jamsosnas pension and death benefits security identification numbers to every citizen in programmes based upon the current Jamsostek Indonesia. and other parameters. we can estimate obliges employers and participants to contribute the total cost of the Jamsosnas programme for certain percentages of wages. from the law. 2 3 .54 per earners. the death benefit ambiguous law. depending on the provisions to a minimum. It will consist of Government. The end result is an degree of the injury. A p r i l 2 0 0 6 05 Arifianto 62 4/21/06. with language that can be programme is estimated to be the same as the diversely interpreted (FIRST Initiative 2005). such details are to be stipulated GOI 2004. assuming that within the first security fund. or BPJS). N o . Jamsostek death benefit scheme (currently 0.75 per cent. 16–17. cent and 23. including representatives from responsible for paying contributions to the poor central government ministries/agencies. they will not be much will be appointed according to the procedures different from existing rates. The members will it is only responsible to pay for the contributions be appointed for a term of five years. The latter two which makes membership compulsory to all programmes would be solely paid for by Indonesian citizens and permanent residents and employers. described in future government regulations (GOI The contribution rate for the retirement benefit 2004. However. Contributions The day-to-day management of the national would be shared equally between employers and social security programme will be carried out by workers except for the death benefit and workers National Social Security Provider Agencies compensation schemes where only the employer (Badan Penyelenggara Jaminan Sosial.

8 security programmes for Indonesian citizens.74 6. their role in implementing the scheme for retired civil servants (Taspen) and provisions of the law. 9:57 AM . regional government has responsibility would not pay any pension benefits to retirees to … develop a social security system” (GOI (GOI 2004a. 2004b). or the possibility for a certain pensions plans sponsored by the private region to create a new social security provider sector are operating as DB pension schemes. but autonomy. the law immediately but these companies have to adjust creates a two-tier pension programmes. A p r i l 2 0 0 6 05 Arifianto 63 4/21/06. There is also a possible conflict with the only a small number of Indonesian workers have a newly amended Regional Autonomy Law (Law DB pension plan at this time. for the next fifteen years or so.10 Currently.3 Unknown 0.24–13.9 which The social security programmes are to be presumably would operate on a pay-as-you-go operated on a national basis.3 (Paid in full by employers) Retirement Benefit Programmes 5.75 22. Article 41(4)). which is a five-year period (GOI 2004a. The first themselves to the new social security law within a tier is the old-age pension programme. There is no reference (PAYGO) scheme. As stipulated by the No.24–7. there might be conflicts with other benefit from a de facto monopoly since no other existing laws. which would be unless a new law is adopted by the DPR (GOI discussed in the next section. defined benefit (DB) pension scheme. it would autonomy law states that “in implementing only accumulate social security contributions.75 (5 classes) Death Benefits Programme 0.24–1. since article 22(h) of the regional draft law.74 0.24–1. the social security law creates the The DB of the old-age pension would be a possibility of turf battles between central and percentage of the average income for the previous ASEAN Economic Bulletin 63 Vo l . such as the pension fund and social security administrators can be appointed insurance industry laws. 1 .75 SOURCE: Author’s calculations.54–23. 2004a. TABLE 2 Estimated Jamsosnas Contributions/Premiums for Formal Sector Workers (% of wages) Programme Total Current Total Known Total Jamsosnas Contribution Rates Jamsosnas Contribution of Jamsostek Contribution Rates Rates (Estimated) Workplace Accident Benefits Programme 0.24–1. and will presumably maintain their status as regional government in implementing social profit-seeking state-owned enterprises (Persero). Thus. Article 5). N o .7 Unknown 16 (equal contributions (10% for old-age for old-age pension pension and 6% and old-age savings for old-age schemes) savings scheme) Healthcare Benefits Programme 3–6 6 6 Total 9. Thus. 2 3 . 32/2004). Article 52).75 0. In These four social security companies would addition. agency. The appointments are effective With regards to the retirement benefits. only the pension to the regions.

Children of workers will continue to scheme (GOI 2004a. and the scheme will be run by a public social security finally civil servants in 1983 (U. whichever comes first (GOI Reform Law 2004a.S. 56. they would not be eligible to receive a monthly the development of a national social security pension (GOI 2003. However. On top of existing old-age savings. which is a fully funded over many decades. Its secondary pension pillar as recommended by the coverage were also expanded over the years to World Bank (1994). 9:57 AM .1 Are the Aims and Goals of the Law the age of fifty-five. it is the Social Security Act of 1935. years before social security benefits and coverage The benefits of the old-age savings scheme in the United States were extended to the level it is would be given as a lump-sum cash payment when today. will receive monthly pension a new DB pension scheme and a National Health payments. and gradually expanded age savings programme. it creates retirement age. or same time. Workers who retired before reaching Insurance scheme. in a lump sum. it sets a target for the fifteen years’ contribution requirement above eventual coverage of all Indonesians. The goals of the its investment returns. GOI 2004a. their survivors (spouses and children regional minimum wage (UMR). it took nearly fifty companies. 59–60). In other countries. the law seems to try to do many things at the benefits from the programme. and death benefits schemes. small number of workers. Critical Analysis of the Social Security three years of age. or start working account after ten years of contributing into the full-time. have remarried. year. This scheme has similarities cover workers’ spouses and dependent children with mandatory individual retirement account (1939). especially would be entitled to receive the accumulated those who are working in the informal sector amount of their old-age savings contribution. and health insurance schemes in countries that have adopted a for citizens over the age of sixty-five (1965). suffer from a permanent unlike the United States) to be able to offer disability. compulsory savings programme operating on a For example. Workers workers will continue to receive pension benefits could start withdrawing their money from this until they died. 2 3 . starting from a small programme covering a The second retirement scheme is called the old. with one important exception: cover agriculture. it only provided similar to the compulsory savings programme run retirement benefits for private formal sector by PT Taspen for retired civil servants and their workers. Widows/widowers of investment returns of their contribution. casual workers. pp. when the United States enacted defined contribution (DC) basis. law are very ambitious indeed. and a worker who has Unrealistic? contributed into the scheme for at least fifteen years will be entitled to receive full pension First. or have reached twenty- IV. The fixed minimum pension under the have died or are suffering from a permanent proposed plan is calculated as 70 per cent of the disability. A p r i l 2 0 0 6 05 Arifianto 64 4/21/06. If the workers comprehensive social security benefits to all its ASEAN Economic Bulletin 64 Vo l .11 Thus. or enter retirement age. plus within the next two decades or so. their survivors if the workers died before reaching work injury. p. Also. These workers. In all. Gradually its benefits were expanded to widows/widowers. work injury (1956). Article programme was carried out over a long period of 41(2)). 1 . Widows and under the age of twenty-three) would receive the widowers of workers and children of the workers benefits. as recommended by the Bank. The total amount of programme benefits will receive a minimum pension between 40 per received by members is the entire amount of their cent and 60 per cent of the local minimum wage contribution accumulated over the years. N o . domestic. start working full-time. Article 41(1)). Expecting Indonesia (a developing country the workers die. The Indonesian retirement age is currently set at IV. Social Security monopoly instead of private investment Administration 2003). receive pension benefits until they are married. plus the (GOI 2003. Article 36). time.

S. N o . Census Bureau 2004).000 per month (about of such analyses as part of the enactment of US$75) would receive a minimum pension of Indonesia’s social security law was viewed with Rp490. both in terms of their employers. an actuarial retirees would receive a pension benefit that is calculation showing the total revenues collected considered generous under Indonesian standard. Thus. Workers in this sector are also very mobile. by the national social security programme and Since it would be closely linked with minimum total expenditures paid to beneficiaries over a wage. These legislation in other countries.2 Would the System Be Financially rapidly within the next few decades. where workers’ would be difficult to measure the future liabilities employment records and payroll stubs are not (also known as the implicit pension debt12) of kept. occupations.and long. At the same time. Indonesia’s social security programme. at 70 per cent of current UMR rate.S. estimated to be about US$21 billion (about Rp200 especially given that records do not exist in the trillion) (Capulong 2004). per cent) (U. decided not to perform the calculation because it The task of extending social security coverage would show that the scheme they advocated would to all Indonesians is further complicated by the not be financially sustainable after a few decades. OECD countries have an average construction worker in an urban centre next implicit pension debt exceeding 200 per cent of month. no known actuarial calculations by 2050 (about 100 million).5 per decades were conducted. social security legislation. live past the current mandatory retirement age of Such analyses have always been an integral part fifty-five years. Philippines estimated that the implicit pension Keeping records of workers with such debt of the country’s public pension scheme is employment patterns would be a daunting task. first place. and a few months later might move to their GNP (James 1997). fact that about 70 per cent of Indonesian citizens Without an accurate actuarial calculation. since the government did not specify how incurred by the Philippines’ social security system. term impacts of this scheme on the labour market This shows that as more Indonesians are able to and on the Indonesian economy in general. 9:57 AM . A worker who does farm amount of the implicit pension debt is very work in his/her village today might become a substantial. Demographic estimates have shown that in line with the international trend of population ageing.000 per month at retirement. citizens within the next decade or two is an suspicions that the proponents of the legislation unrealistic proposition. Nor have there been any cent of the population) to 60.5 million in 2050 (18 reliable economic analyses on the short. would have an implicit pension not considered when the social security law was obligation that would be much larger than the debt passed. 2 3 . it would be We could predict that Indonesia. Indeed. it plans to address this issue. Without accurate records. it are working in the informal sector. they would be eligible to receive of the enactment of social security reform pension benefits prescribed under the law. which has a impossible to collect contributions and pay out population about three times larger than the benefits to these workers. the absence minimum wage of Rp700. concern by Indonesian stakeholders and raised Since there would be approximately 100 million ASEAN Economic Bulletin 65 Vo l . It is estimated Sustainable? that Indonesians aged fifty-five years and older Another reason why stakeholders were troubled by will increase from about 10 per cent of the the new law is the fact that during its drafting and population in 2000 (about 23 million) to one-third deliberation. Apparently this fact was Philippines. the Indonesian population is expected to age very IV. the detailing future contribution rates and benefits Indonesian population aged sixty-five years and payable under this scheme for the next few older will rise from 10 million in 2000 (4. A p r i l 2 0 0 6 05 Arifianto 65 4/21/06. 1 . A study from the coastal areas to work in the fisheries sector. a period of 75 years is mandated as a part of the worker who live and work in Jakarta with current U. and Experiences from other countries showed that the the place they live.

This would mean that the prospect of spending substantial funds to bail out contribution of the formal sector workers would failing public pension scheme is a frightening be set at a much higher rate than the informal scenario for Indonesia. 2003).000. 1 .7 per cent today down to 5. The effect of the As a result of this large gap between the imposition of higher contribution rate is similar to contribution rate of formal and informal workers. workers would pay the contribution rate by taking Italy.000 per month is only responsible in Market? paying Rp10. shifting such costs to their workers. the government would have to rate of about 9. indicative from the fact that formal governments. further borrowing in order to pay for it. meaning that his contribution rate is it mandates a somewhat high contribution rate only 10 per cent of his wages.13 Thus. while 72 per ASEAN Economic Bulletin 66 Vo l . 355). not be conducive for the new government’s plan to posed social security trust fund were insufficient reduce unemployment by half. month and is charged a 22. a careful second sector workers. 9:57 AM . there will be more than 1 per cent equal to about US$61 billion) to fulfil these reduction in total employment. This shows that the (between 22 and 23 per cent of workers’ payroll). it is highly questionable whether the in the labour supply (Suryahadi et al.5 per cent contribution rate. an informal worker earning Pension Scheme on the Indonesian Labour Rp100. the effect of a government-mandated increase in there would be significant incentives for formal the minimum wage. section 1). in 2050 the increase in the urban formal sector in Indonesia Indonesian Government will have to spend Rp49 shows that for every 10 per cent in real minimum trillion each month (or Rp588 trillion per year.3 What Are the Impacts of the Proposed the other hand. Since labour supply in a workers to evade paying the full cost of their competitive labour market is perfectly elastic. if a formal worker look at the proposed scheme is needed to prevent earning a monthly income of Rp1 million per such a scenario from occurring. The Article 17. Indonesian retirees living in the year 2050 and A Social Monitoring and Early Response Unit assuming that each pensioner will receive a (SMERU) study on the impacts of minimum wage monthly pension of Rp490.1 per either use the general state budget or engage in cent by the year 2009. social security contributions by switching to the employers could be expected to response to this informal sector. With this enormous pension other factors such as economic growth and growth obligations. p. the law seems to imply that there The cost of bailing out insolvent social security would be a cross-subsidy from formal to informal trust fund could be very substantial to workers. third of their general revenue budgets towards while the informal workers would only pay a fixed bailing out their failing public pension funds flat-rate amount of their salary (GOI 2004a. wages. controlling for pension obligations. We government would have adequate funds to pay the could expect that the higher social security pension benefits of every retiree under this contribution rate would result in similar losses of scheme when the bill becomes due forty-five years formal job opportunities. employers and workers. For example. If the money accumulated in the pro. during the 1990s (James 1997. and Hungary had to spend more than one. A p r i l 2 0 0 6 05 Arifianto 66 4/21/06. while continuing to earn the same increase in social security contribution rates by earnings they receive as formal workers. something that would from now. Indeed. For instance. security programmes.000 per month as social security Another frequent criticism of the law is that since contributions. in the form of international evidence shows that evasion has lower (or held constant) salaries. N o . a certain percentage deduction in their payroll.14 the amount of his wages that goes to pay social security benefits would be Rp225. European countries such as Austria. On IV. 2 3 . Additionally. tax rate of informal workers is much lower than it would create significant financial burden for their counterparts with formal sector employment.000. from the current to pay for this debt. possibly even caused significant problems in publicly run social reducing the number of workers employed.

even though many argued that that could be provided efficiently and they would be the ones who need social security competitively by the private sector) to the same protection the most. not covered by any social security schemes. 1 . The government-run social security programmes in these countries are always IV. responsibility of the government. 2 and No. to be carried out. social that the rate of return of publicly managed pension security provision would become the sole fund is much lower than that of a private plan. companies. ILO 2003). 11/1992. In the end. respectively). or while workers as the real owners of this fund are because they failed to claim the social security not allowed to participate in the decision-making benefits they are entitled to even if they have of the fund. Thus. if not insurance plans could be made part of the nation’s impossible. waste. As a Evidences from other countries show that result. made some contributions into the scheme. and distributed among beneficiaries. putting the estimated that there are about 345 private pension sustainability of the system in serious doubt. many informal workers are how the country’s social security fund is managed.e. and bad investment choices in the Provision of Social Security in Indonesia? made by bureaucrats. we could expect that many formal financial market in Indonesia (McLeod 1993). the private pension and health 2004). despite the fact While the return of privately managed pension that most formal sector workers already have funds averages about 7 per cent per annum. informal sector workers continue to be entrusting the operation of the national social excluded from the publicly sponsored social security scheme (or the production of any goods security scheme. either invested. because the tax collectors could not find them. both 2005. plans and over 500 private health insurance In addition. before the country’s pension insurance industry in Indonesia has been growing scheme was fundamentally reformed. This is because social security programme. Yet according to the law. (Laws No. 9:57 AM . in Indonesia and in other developing countries in The companies providing these pension and the past. the government) is a recipe for disaster. 2 3 . cent of the Philippine’s labour force are legally by private pension and health insurance members of the country’s social security scheme. the government worker from one month to another to collect their alone with the existing social security state social security contributions could become a futile enterprises will continue to make decisions on exercise..15 have been very difficult.4 Does the Law Promote Unfair Competition prone to fraud. According to the law. party that also regulates it (i. As long as the gap development of private insurance and pension between the formal and informal sectors’ social industry in Indonesia by giving them sound legal security contribution continue to exist in standing and also to strengthen the growing Indonesia. A p r i l 2 0 0 6 05 Arifianto 67 4/21/06. and providing the the type of jobs they undertake and in the place highest returns of investments to participating they live. This could be seen from the fact for Indonesians. Indeed. They either obtained such benefits only about 28 per cent of these workers actually from their employers or personally purchased paid their compulsory contributions (Capulong them. N o . attempts to collect social security plans in Indonesia at this time (First Initiative contributions from informal sector workers. It is workers will try to evade paying it. making the industry many informal workers are very mobile both in fully competitive and efficient. In Argentina. the adequate health and retirement benefits provided average returns of publicly managed fund is ASEAN Economic Bulletin 67 Vo l . which will reduce the real Finally. more than rapidly since the enactment of the Laws on the 50 per cent of the country’s formal workers Insurance Industry and Pension Fund in 1992 evaded their social security contributions. trying to find a particular informal workers. the legislation disregards the role of rate of return of these programmes to their competition in providing social security benefits beneficiaries. resulting in large budget deficits to the These laws were enacted to encourage the government (James 1997).

similar disregard to their objections to the law’s situation has also occurred in the management of provisions — stakeholders’ fear about the true Indonesia’s private formal workers social security intent of the law supporters might once again be scheme run by Jamsostek. anecdotes of mismanagement in Jamsostek that seemed to be continually reported in the news V. A p r i l 2 0 0 6 05 Arifianto 68 4/21/06. as indicated by the and cronies. by declaring the relatively low rate of workers’ participation in the government as the sole manager of workers’ social scheme. many parties acknowledged the need for a fundamental overhaul of the system. low rate of returns of the national social security funds. along with proven correct. security fund. there is a consensus among be passed through by the proponents of the law to economists and policy-makers that publicly convince sceptical stakeholders that the proposed managed social security scheme is no longer social security trust fund would be different than viewed as an ideal system to finance workers’ previous trust funds mentioned above. many stakeholders are wondering if the security reform proposal as stated in the National true intention of the government and the DPR in Social Security System Law would generate a new passing this law is to help poor Indonesians to pension scheme that would be too generous and achieve better social security protection.). Finally. and if adjusted to the of proof. which could put additional fiscal strain the rice marketing board (Bulog) fund of the New on the government. an off-budget slush fund similar to that would start to occur within the next few the forest conservation fund (dana reboisasi) and decades.17 Yet. there is a high burden of proof that has to Internationally. –1.16 diminishes the confidence of most Old-Age Security Provisions in Indonesia Indonesian workers in the publicly run social security scheme. Therefore. The both public and private.8 per cent per annum. on the creation of these funds (preserving the contributing to more formal sector job losses environment. IV. the social security. Policy Recommendations to Improve media. This fact. abysmal. Many could endanger the fiscal sustainability of the have speculated that the real aims of the law government. Despite their official rationales conditions of Indonesia’s labour market. because of a programme for themselves. Given the nature of the deliberation growth rate in per capita income the returns would of the law itself — it was passed with little be –8. the proceeds were really used and creating incentives for workers to remain in for the personal use of certain high-level the informal economy. and poor management of the scheme. It might also worsen the Order period. Many of them would prefer to Indonesia is at a crucial stage in its effort to have direct control over the investments of their provide more adequate social security coverage to social security fund. Since the track record of the misuse of previous trust funds set up by the government in managing these off-budget funds is government in the past. scheme so that it would work better for them. the law as it is now current social security system is not sustainable continues to deny the opportunity for these and has not been successful in providing adequate workers to shop for the best social security benefits to the workers covered by it. it also ignores government officials and also to fund financially the potential for poor governance and misuse questionable projects proposed by their families of the social security trust fund. 2 3 . the current Indonesian social Indeed. The legislation does not take into supporters is to create a huge fund outside the account rapid ageing projections of Indonesians state budget. 1 . 9:57 AM . So far.4 per cent (Iglesias and Palacios 2000). chosen competitively from its citizens and to reform its current social security different firms that offer social security coverage. consultation with the stakeholders and with total As described in section II of this paper. Many of these countries have supporters of this law have not showed this burden pursued other alternatives to achieve universal ASEAN Economic Bulletin 68 Vo l . etc.5 Unholy Motives? Unfortunately. N o .

for diversify the risk of the private sector. provision of social security benefits would • The second pillar is a fully privately managed positively improve service delivery. imposing penalty for early withdrawal. is based on instance. This resembles existing public pension plans Social security financing and provision should no such as Jamsostek but with a much smaller size longer be regarded as a government monopoly. linked to his/her contributions plus the return More than twenty developed and developing on investment. ASEAN Economic Bulletin 69 Vo l . The three-pillar strategy. the provision of their social security programmes. Recent reforms possible costly bailouts from the state budget. adopted in many other countries are built around • The third pillar is a voluntary savings scheme “three pillars” that provide old age pension for people who want more consumption in old- benefits to their citizens. providing Recent experiences from various countries have a social safety net for the old. and focusing solely on redistribution. 1 . 9:57 AM . It links social security provision and. whereby the worker’s pension is programme’s members (Fox and Palmer 1999). The central idea is to create a from these international experiences with pension credible mechanism for individuals to commit reforms. therefore. avoids defined benefit pension scheme. particularly those shown that private sector involvement in the whose lifetime income is low. promote programme that handles people’s mandatory competition and innovation that would improve retirement schemes and insurance. which will to their long-term retirement planning by. in the end. the government FIGURE 1 Countries that Have Adopted Mandatory Privately Managed Social Security Scheme as their Primary Social Security Plan. A p r i l 2 0 0 6 05 Arifianto 69 4/21/06. the following principles: Because of its importance. 1982–2000 80 Hong Kong 70 Hungary El Salvador Kazakhstan Poland 60 Bolivia Argentina Mexico 50 Australia Uruguay In millions Colombia United Kingdom Denmark 40 Peru 30 Switzerland Netherlands 20 Chile 10 0 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 SOURCE: James (2004). 2 3 . This programme is fiscally countries (see Figure 1) have introduced reforms sustainable in the long run as benefits are tied to to overcome the financial problems inherent in the workers’ contributions and. N o . social security coverage for their citizens and at • The first pillar is a publicly managed the same time maintain competition and choice in programme that provides for a social safety net.18 Indonesia could learn age strategy. improve benefits to contributions as in a defined con- health and retirement outcomes of the tribution plan.

The estimated that these problems would be minimized programme can be run either by the public and if it were run under private management. A p r i l 2 0 0 6 05 Arifianto 70 4/21/06. The means-tested transforming its public pension scheme into a programme for the elderly is integrated privately and competitively managed pension with means-tested programmes for the general scheme based on the three-pillar paradigm. improving not-for-profit non-governmental organizations confidence of workers in the scheme. N o . can design a compulsory social security While the current Jamsostek scheme suffered from programme for its citizens. as a universal flat benefit scheme. so ASEAN Economic Bulletin 70 Vo l . private sector.21 This special pension for the poor could their investment returns. should ideally be financed through general tax gramme to help the poorest citizens who are revenues so that it would not create additional no longer able to work. The accounts might not be sufficient to meet the three-pillar option includes both public and private retirement expenses of some workers. new taxes or fees. Furthermore. the A means-tested benefit takes all income and Indonesian Government should seriously consider assets into account for eligibility. experiences show that the However. 2 3 .20 The amount of ways: assistance provided by this programme would meet (1) Ensure the implementation and enforcement the basic expenses of these poor elderly (for of necessary regulations and establish example. it is for the programme to be run as a monopoly. and improving the be given either as a means-tested pension scheme or scheme’s governance (Fox and Palmer 1999).19 provider. which could be burden to businesses and current workers through funded through general taxation. population. This is a safer social security would not have accumulated sufficient funds policy as it diversifies risk among different available in their accounts for use after retirement providers. The government chosen competitively by the workers themselves. while the schemes in the other option to choose a social security programme that countries are managed by private financial firms is suitable for their own needs. for example. rather than accumulate all risk in one and because their lifetime income was too low. Judging from the success of these countries. 9:57 AM . faces chronic health problems. increasing (NGOs). 1 . because they sector management. it is also recognized that relying solely programme would earn better returns for its on earnings from private individual retirement participants if it is run by the private sector. The only major difference is that the existing scheme is managed by a government entity Workers and employers should be given the (Jamsostek). Such programmes (2) Provide a separate social assistance pro. savings for investment. should appoint sound and reputable banks for retirement savings scheme run under the Jamsostek this scheme. Indonesia already has a foundation for an presumption that a young person can work individual retirement account scheme. but it is not necessary many governance and managerial problems. The current productively while an elderly person could not. the main difference being the In fact. To ensure that the funds allocated for this income support scheme would be As seen from Figure 1. the government could subcontract succesfully reform their public pension schemes the delivery of such funds to private banks or to using the three-pillar paradigm. The government should pursue a special income The government could play an important role in support programme to assist this group in meeting the provision of social security in two additional their retirement expenses. food and utility bills) and also would financial prudential regulations for pension provide emergency assistance when the elderly funds. sufficient incentive programme is in many ways similar to individual should be created to attract people to join the retirement accounts in many countries since these scheme through. However. many countries have effectively spent. personal income schemes are fully funded DC schemes with no tax deduction and the possibility of using the income redistribution between different workers.

consider introducing tax incentives to encourage economically. there is less concern with work incentives in the coverage to all Indonesians. and South Africa taxation scheme collected from workers’ wages. Dr Estelle James. training should be provided for families of proceed immediately to overhaul this social sick and infirm elderly. Mauritius. especially the poor old-age programme. to create new employment for Indonesian workers. The author also benefited extensively from the comments given by Dr Ross McLeod. A p r i l 2 0 0 6 05 Arifianto 71 4/21/06. Namibia. who suddenly have to bear security law and replace it with one that would the burden of caring for them. benefits. 9:57 AM . (James 2004. destined to fail. In most of these countries the universal which would motivate them to evade the scheme. we should recognize that historically be managed by state-run monopolies and. 1 . NOTES The author would like to thank his SMERU colleagues. and politically. Denmark and New Zealand. Countries that have adopted a working in the informal economy. showed that this scheme is countries such as Botswana. and Mr Bambang Sulaksono. and because it would Finally. pp. The current Yudhoyono government should Finally. run most of the financial assistance provided for contrary to market principles. If reforms are not efforts to attract new investors to the country that implemented immediately to reverse this cost. encourage the role of private competitive market in assisting Indonesia to meet the goal of providing social security coverage to all VI.22 This might include efforts coverage. both Netherlands. 46–49). It should also elderly relatives. lessen the financial burden of these families. so that they are able maintain the country’s fiscal sustainability and to provide appropriate and humane care for their promote economic growth. the means to means-tested pension benefit for the elderly achieve it would be based on a compulsory include Australia. flat benefits are financed out of general revenues create significant fiscal burden to the Indonesian (ibid. for their suggestions in drafting this paper. Indeed. pay a internationally and within Indonesia during the flat benefit. and the programme would continue to be be run Some developed countries such as the as a government monopoly. government and taxpayers. Many developing been implemented. N o . 2 3 . within the next families to care for their aged relatives and to few decades. Dr Asep Suryahadi. The country might also Indonesia would pay dearly. when most elderly Indonesians comes from their own other countries in the world is looking to reduce families. and two anonymous reviewers on earlier versions of this paper. uniform for every old person who past thirteen years the Jamsostek scheme has resides in the country. ASEAN Economic Bulletin 71 Vo l . Hong Kong. Thus. financially. It would create substantial and Nepal offer more modest universal flat economic burden for employers and workers. 49–50). All errors and omissions are the sole responsibility of the author. would generate such jobs.. Dr Sudarno Sumarto. combined with to fail in other countries. relying on the same scheme that has been proven preferably in better-paying sectors. pp. Indonesia is moving backwards. there should be incentives to the role of their government in providing social ensure the long-term sustainability of these family security coverage for their citizens and to rely support arrangements as the country continues its more on the private sector to provide such path of development. Experiences. Concluding Remarks Indonesian citizens and helping to create social While the official intention of the National Social security provision that truly would work for Security System Law is to extend social security all Indonesians.

employers are required to pay about two months’ wages per year in addition to normal salaries. 11. Weller 2002. The contribution rate of informal workers would be a fixed. they would not be discussed in this paper. 9:57 AM . Jamsostek for private formal sector workers. 16. For details. 3–4). The benefit is a direct product of the contributions paid to the investment accounts. disability. 12. However. PT Jamsostek conducted a pilot project that attempts to collect Jamsostek contributions from informal sector workers. some private sector workers also contribute to the compulsory old-age savings scheme (Jamsostek). 13. 7. flat rate contribution based on a fraction of their salary. p. 2 3 . due to the many difficulties it found in collecting contributions from them. it is not surprising for employers to favour a private social security system over a public one. It is assumed that employers are able to fully shift the cost of their social security contribution to their workers. of this pension scheme rest with the workers (ILO 2003. xxii. 5. Implicit pension debt is the present value of amounts promised to current retirees and workers enrolling in a pension scheme (James 1997. but not the control. However. The World Bank has recognized this in its most recent review of pension reform worldwide and has expanded the “three-pillar” social security system into a “five-pillar” system. The risks. 18. Workers who have pension coverage tend to be civil servants (covered by the Taspen scheme) or those working with state-owned enterprises and large companies (ILO 2003). xxii. This clause is commonly interpreted as a “bail-out” clause that would be carried out if the social security scheme is facing serious financial problems or insolvency. The DB scheme is a retirement plan in which workers are guaranteed a benefit upon retirement. Specifically. there are other publicly sponsored retirement scheme such as Taspen (for civil servants) and Asabri (for members of the armed forces). 3. and community health maintenance schemes (JPKM). The PAYGO system is a social security system in which no funds are set aside in advance and benefits for current retirees plus administrative costs are paid from current workers’ contribution (ILO 2003). 10. 10 per cent are covered by a public health insurance scheme (Askes for civil servants. The funding of the plan’s liabilities (promised benefits) and the risks associated with the scheme become the responsibility of the employer/government (ILO 2003. Examples of alleged misuse of Jamsostek fund range from the construction of the Jamsostek Tower (Menara Jamsostek) office building in the Kuningan area to stories about Jamsostek investment in the bankrupt Bank Global that was revealed earlier this year (Tempo Interactive. The original draft of the National Social Security Law envisioned that these agencies would be converted into a single social insurance agency. 8. A p r i l 2 0 0 6 05 Arifianto 72 4/21/06. 356). (2005). pp. Thus. However. Including the requirement for employers to pay a bonus equivalent of one month’s wages for the Idul Fitri holiday. or UMR). but at provincial and sometimes at district/ city level. The minimum wage is commonly called the Regional Minimum Wage (Upah Minimum Regional. 9. About 5 per cent have private health insurance coverage (ILO 2003). age. Indeed. 14. to be determined later in a future government regulation. Non-retirement schemes created by the new law (such as the national health insurance. 1. 1 . section 48 of the social security law states that the government could “perform special actions in order to secure the level of financial health of a Social Security Provider Agency” (GOI 2004a). Weller 2002. workers are responsible of paying the full cost of their social security taxes. and death benefits) would not be analysed in this paper. Of course. due to their relatively small size. In 2002/03. regardless of what the law stipulates. 15. and final or lifetime earnings. 4 January 2005). p. 3–4). The minimum wage in Indonesia is decided not at the national level. it has quietly “postponed” this project. For further details on the three-pillar social security system. (2003) and Arifianto (2004) for further details regarding these schemes. p. 4. which would have been a non-profit entity. this proposal was dropped in the latter version of the draft. The DC scheme is a retirement plan in which only the contribution rates and bases of benefits calculations are determined in advance (not the benefit level). 17. In addition to Jamsostek for private formal sector workers. 19. 6. see World Bank (1994). ASEAN Economic Bulletin 72 Vo l . pp. the fact that many Indonesian labour union leaders favour it as well shows workers’ great lack of trust in the public social security scheme such as Jamsostek. However. N o . usually based on years of service. See Perwira et al. plus return of investments from these accounts. 2. This is reflected from the author’s personal communications with various representatives of the Indonesian employers’ associations (KADIN and APINDO) and labour unions. In addition. see Gill et al.

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