Indonesia needs pension system reform<\/p>\n
By Stanislav Velinov<\/p>\n
This is the first of two articles on Indonesia's pension
\nsystem.<\/p>\n
HONG KONG: As the Indonesian government begins to streamline
\nthe use of pension funds in many departments and institutions, it
\nis perhaps the right time to learn a lesson on the use and
\nsystems of pension funds in other countries in transition.<\/p>\n
A country in need of successful pension system reform would
\nmaybe ponder the following issues:<\/p>\n
- Public discontent with the existing pension system and
\nforecasts for its inevitable financial catastrophe;<\/p>\n
- existence of public and political will for reforms and
\nreadiness for implementation of non-standard measures and
\ntechniques by the government;<\/p>\n
- lack of alternative views for the philosophy of the pension
\nreform and unwillingness for bearing responsibility on the issue
\nby the political opposition;<\/p>\n
- in expectation of the creation of something \"positive\" for the
\npresent and future pensioners, there is relatively good public
\nand media support;<\/p>\n
- readiness of domestic and foreign donors and international
\nfinancial institutions to support technically and financially the
\nreform by covering the initial deficit.<\/p>\n
Considering the above, proper functioning of the pension
\nsystem is one of the main indicators of a country's social
\nsecurity and prosperity. The more civilized and advanced a
\ncountry is, the more civilized and advanced the pension system.<\/p>\n
Recently Indonesia, one of the most populous nations in the
\nworld, was shaken by a scandal involving mismanagement and misuse
\nof a corporate social welfare and pension fund, namely the Bulog
\naffair.<\/p>\n
Instantly the issue was placed on a political pedestal,
\nscrutinized as the next scandal of corruption, collusion and
\nnepotism (KKN). The question: \"Is the present pension system good
\nenough?\" may have crossed people's minds.<\/p>\n
The answer to this question is very complex and is a part of
\nthe sociopolitical spectrum in the country. It is not our task to
\ncomment on the pluses and minuses of the present pension
\ninsurance system, but to see what are the pension reforms
\nundertaken by other countries in transition.<\/p>\n
One of the popular pension systems is called the \"Tri-pillar\"
\nsystem. The first pillar consists of the public pension system
\nwhere the social security payments of the employed people support
\nthe pensioners.<\/p>\n
The second pillar -- the supplementary mandatory pension
\ninsurance, is based on a capital principle, which means that the
\npension compensation is determined by the amount of funds
\ndeposited by the employee and his employer(s) in the pension fund
\nduring his employment life. The participation in such a fund is
\nmandatory.<\/p>\n
The third pillar -- the supplementary voluntary pension
\ninsurance, is similar to the second pillar, but the participation
\nin the fund is optional to the employee and his employer.<\/p>\n
What is the logical order to be followed and what steps are to
\nbe taken by the legislature?<\/p>\n
Certainly, the first step is the adoption of a law regulating
\nthe activities of the existing funds and providing the basis for
\nadaptation within a more sophisticated tri-pillar system.<\/p>\n
The key-issue in such a program is the establishment of a
\ncentral regulatory body which is to become the core of the whole
\npension system in the state.<\/p>\n
This body should guarantee the security of the pension funds,
\nstimulate people's initiative to participate and contribute and
\nlast but not least should create such structures and institutions
\nthat will manage the funds professionally.<\/p>\n
Taking into consideration the last aspect, the question about
\nthe management instantly comes up. Who is the one to manage these
\nfunds, how and where will the funds be invested?<\/p>\n
Certainly, these issues are regulated also by the law and in
\nsome countries the scheme is working in such a way that the
\npension fund is obliged to invest up to 90 percent of its
\nborrowed funds in specific government bonds and fixed income
\ninstruments. Remaining percentages usually cover operational
\ncosts and some minor investments.<\/p>\n
Balance cash positions and refinancing of the fund members or
\nshareholders are some of the points of strict monitoring by the
\nregulating body and the law is very conservative on such events.<\/p>\n
However, the law in the well developed countries gives access
\nof the pension funds to the primary and secondary capital markets
\nwhere they may invest or raise additional funding for their
\nneeds.<\/p>\n
The striking issue is the social conflict between employed
\npeople and pensioners and which system the legislation will
\nadopt. The reform alternatives are not in abundance and we can
\nidentify some of them.<\/p>\n
The first one is when pensioners receive fixed budget-
\nsubsidized pensions regardless of their pension contributions.
\nThe system is not flexible and creates social discontent but
\nenables easier planning and additional funding to budget deficit.<\/p>\n
Only presently employed people would be able to benefit from
\nthe capital-based compensation when they retire. The second
\nalternative is when the pensions are calculated on the basis of
\nworking experience and volume of contributions made.<\/p>\n
In this scheme the burden is heavier on presently employed
\npeople because they have to compensate those already retired and
\nmeanwhile accumulate resources for their own pensions.<\/p>\n
Since the process is regulated through the state-budget, the
\ndeficit gap will be higher and perhaps compensated by higher
\nmandatory contributions from the public sector.<\/p>\n
This gap in the state-budget is to be managed by the
\nexecutive and legislative branches of the government in such a
\nway that the ratio of the pay-as-you-go system is closer to zero
\nor even positive.<\/p>\n
However, there are eventual risks connected with rising
\nunemployment, demographic and politic problems, economic factors,
\netc.<\/p>\n
For this reason, the regulatory body mentioned earlier should
\nnot only monitor the strict adherence to the present legislation
\nbut also forecast eventual politico-economic risks which may
\nimpact the ratio of the pay-as-you-go system.<\/p>\n
The dilemma of who should take the main pension insurance
\nburden (employee or employer) remains. Different countries have
\ndifferent solutions to this issue.<\/p>\n
The perfect scheme is where the burden is equally divided
\nbetween the two social partners but in developing countries with
\nlow wages and poor law enforcement such a scheme is hardly
\nacceptable.<\/p>\n
The reason is that in many countries in transition, the so
\ncalled \"black market\" or \"economy in shadow\" provides employment
\nto, in some case, up to 30 percent of the working force.
\nAdditionally, up to 22% of the population benefits from
\nthis economy.<\/p>\n
The employers, if such eventually exist, remunerate their
\nemployees with unregistered funds and in the best case, they
\ndeclare to the tax authorities a minimum wage compensation thus
\navoiding tax and social security obligations.<\/p>\n
In many countries, minimum wages are tax-exempted but the
\npension compensation becomes a burden on the budget. Thus, the
\npoor law enforcement leads to budget burden.<\/p>\n
The writer is executive director of Tat On Investments Ltd,
\nHong Kong and a private asset manager.<\/p>",
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