Creating a better social security system for Indonesian workers<\/p>\n
Alex Arifianto
\nJakarta<\/p>\n
The Indonesian government is currently undertaking a major
\nreform of the country's social security system to provide social
\nsecurity coverage for all citizens, regardless of their income or
\nemployment status.<\/p>\n
The social security programs offered by the government would
\nbe quite comprehensive, consisting of old-age pension, National
\nHealth Insurance, workers' disability and death benefit schemes.
\nStarting this week, a bill drafted by a government task force on
\nsocial security reform will be deliberated by the House of
\nRepresentatives and is expected to be passed into law by the end
\nof this year.<\/p>\n
While the government's effort to extend social security
\ncoverage to all Indonesians is commendable, many stakeholders,
\nincluding employers, workers and independent experts, have
\nquestioned the feasibility and sustainability of the government's
\nproposal. They point out that the financial feasibility of this
\nprogram has not been comprehensively analyzed, that the
\ngovernment has not been forthcoming in detailing the tax rates
\nand the benefits that would be provided by the proposed scheme
\nand that the long-term sustainability of the program is in doubt,
\nwhich could lead to substantial budget deficits in the future.<\/p>\n
The most glaring flaw perceived by critics of the government's
\nproposal is that it disregards the role of free and competitive
\nmarkets in providing social security benefits for Indonesians.
\nAccording to the bill, social security provision would continue
\nto be the sole responsibility of the government. The government,
\nthrough monopolistic social security corporations of its
\ncreation, would continue to make decisions on how the money was
\ncollected, managed, invested and distributed to beneficiaries.<\/p>\n
However, individual workers would not be allowed to
\nparticipate in the decision-making over the social security fund,
\neven though the money put into the national social security fund
\nwould be their own. At a recent seminar, it was revealed that
\nworkers and the labor unions representing them have little
\nconfidence in publicly run social security schemes, given past
\nmisuse of social security money by the entities managing it.<\/p>\n
Similar problems have also been found in publicly run social
\nsecurity schemes in other countries, mostly in Latin America and
\nEastern Europe. These countries' experiences show that it is not
\na good idea for the government to both regulate and operate the
\nnational social security scheme at the same time.<\/p>\n
A separation between these functions is needed in order to
\nhave a truly functional social security system that works for
\nemployees.<\/p>\n
Advocates of social security reform have proposed an
\nindividual social security account scheme as a solution to fix
\nthe problems affecting the public social security schemes
\ndescribed above. In this scheme, workers and employers' social
\nsecurity contributions would be earmarked for each individual
\naccount. Each worker would be given a choice to manage their own
\naccount either by themselves, with the assistance of a private
\nfinancial management firm, or through their employers.<\/p>\n
Private management of social security funds would improve the
\nperformance of workers' social security savings, because they
\nwould be able to make investment decisions without political
\nintervention from the government. This would result in higher
\nrates of return for workers. Private managers would be able to
\nmaximize the return on the funds they managed by optimally taking
\ninto account both returns and risks of available investment
\nschemes, because they would not be constrained to make
\ninvestments in assets that have low returns and low risks, such
\nas bank deposits or government bonds.<\/p>\n
Individual accounts would put maximum control over the
\ninvestment management of social security funds in the hands of
\nindividual workers. Instead of entrusting their investment to a
\nnontransparent and unaccountable government monopoly, workers
\nthemselves would have full control over their retirement
\ninvestment and would be free to chose investment managers and
\nplans that suited their tastes and preferences.<\/p>\n
In this scheme, the role of the government would be limited to
\nissuing and enforcing appropriate regulations to safeguard the
\nworkers' social security savings. Such regulations should be kept
\nat a reasonable level to prevent government intervention in the
\nmanagement of social security funds, while at the same time
\nshould ensure the safety of such funds from possible fraud, waste
\nand abuse.<\/p>\n
In Asia, the private social security system has been adopted
\nin Hong Kong, while China is considering converting its public
\nsocial security fund into a private one.<\/p>\n
In sum, private social security schemes are now recognized
\nworldwide as an effective way to provide social security coverage
\nfor workers. Given this global trend, Indonesia should seriously
\nconsider it, since the private social security scheme has been
\nproven very successful in increasing economic growth, investment
\nreturns and fund governance. This scheme also has received broad
\nsupport from businesses, labor unions and workers.<\/p>\n
The writer (aarifianto@smeru.or.id) is a researcher with the
\nSMERU Research Institute, a Jakarta-based public policy
\ninstitute. The views expressed here are solely those of the
\nauthor.<\/p>",
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