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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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The pension system in indonesia

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

Indonesia s workforce is largely informal
Indonesia’s workforce is largely informal …


Source: Central Bureau of Statistics

And based in agriculture trade services
…and based in agriculture, trade, & services

Source: Central Bureau of Statistics



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


Department of Manpower& Transmigration

Ministry of Stated Owned Enterprises

Department of Finance

Department of Health

National Social Welfare Agency

Ministry of


  • 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.






Askes delivers Health Care Services on behalf of Asabri


(Health Care)



Responsible for delivery of social security programs to workers employed in “Legal Entity” workplaces

Taspen (retirement)

Private Pensions Funds

Private Insurance Companies

Summary of pension landscape 1
Summary of Pension Landscape (1) decades.

  • 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

Summary of landscape 2
Summary of Landscape (2) decades.

  • 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

Recent steps at reform
Recent Steps at “Reform” decades.

  • 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

Key concerns
Key Concerns decades.

  • 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

Some illustrative estimates on impacts of the new social security system
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