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 … Source: Central Bureau of Statistics %

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

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

2000 Population Age Pyramid

2050 Population Age Pyramid -UN Projections

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

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

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

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

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

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

Full Funding Asset Reserves as % of GDP – All Scenarios