The Pension System in Indonesia

1. 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

2. Indonesia’s workforce is largely informal … % Source: Central Bureau of Statistics

3. …and based in agriculture, trade, & services Source: Central Bureau of Statistics

4. Indonesia’s population will age faster in the next decades.

5. 2000 Population Age Pyramid

6. 2050 Population Age Pyramid -UN Projections

7. STRUCTURE OF THE SOCIAL SECURITY SYSTEM PRESIDENT Republic of Indonesia Coordinating Ministry for the Economy, Finance & Industry Coordinating Ministry for the Economy, Finance & Industry National Planning Agency BAPPENAS • Responsible for: • Issues relating to the restructure of Social Security In Indonesia • Responsible for: • Efforts to empower the poor through poverty alleviation policy • Responsible for: • Strategic planning and development in Indonesia. Social Security Reform Task Force PEOPLE’S ASSEMBLY Department of Manpower& Transmigration Ministry of Stated Owned Enterprises Department of Finance Department of Health National Social Welfare Agency Ministry of Defense • Responsible for: • Labor legislation • Supervision of JAMSOSTEK • Responsible for: • Oversight of public limited liability companies (Perseros) • Responsible for: • Supervision of Insurance companies & pensions schemes • Responsible for: • Provision of Health Care (except Askes & Jamsostek) • Responsible for: • Provision of Social Welfare • Responsible for: • Provision of Pensions & Health Care for armed Forces Members. Monitoring Supervision Monitoring Monitoring Monitoring Askes delivers Health Care Services on behalf of Asabri Asabri (Health Care) Askes JAMSOSTEK Responsible for delivery of social security programs to workers employed in “Legal Entity” workplaces Taspen (retirement) Private Pensions Funds Private Insurance Companies

8. 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) • < 10% of population • <15% 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

9. 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

10. 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

11. 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

12. 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

14. Full Funding Asset Reserves as % of GDP – All Scenarios