Proposed Indonesian social security reform: Will it work?<\/p>\n
Alex Arifianto, The SMERU Research Institute, Jakarta<\/p>\n
Indonesia's social security program is currently undergoing a
\nmajor overhaul designed to make the existing system work better
\nfor its beneficiaries and to extend social security coverage to
\nmore Indonesians, both in the formal and informal sector. This
\nreform is being undertaken because the existing social security
\nscheme (Jamsostek) has failed to provide adequate benefits to
\nbeneficiaries because of the low number of people it covers, its
\nlow benefits and investment returns, and poor governance.<\/p>\n
The Indonesian government has completed a draft law on the
\nreform of the National Social Security System, also known as
\nJamsosnas, and it is expected to be approved by the Indonesian
\nlegislature (DPR) before the election campaign starts this March.
\nThe scheme proposed by the government is very comprehensive,
\nconsisting of old-age pension, National Health Insurance and
\nworkers' disability schemes. It will cover all Indonesian
\ncitizens, regardless of whether they are formal workers, informal
\nworkers or self-employed.<\/p>\n
The old-age pension program is a defined-benefit social
\ninsurance program operating under a pay-as-you-go mechanism. The
\ndefined benefit of the old age pension is a percentage of the
\naverage income for the previous year, between a minimum of 60
\npercent and a maximum of 80 percent of the local minimum wage
\n(UMR). Each worker will receive a guaranteed minimum pension in
\nthe amount of 70 percent of the UMR.<\/p>\n
The National Health Insurance program is designed to provide
\ncomprehensive health benefits providing basic health services,
\nranging from health services promotion to preventative treatment,
\nsuch as immunization and family planning. Both public and private
\nhealth providers can deliver these services, as long as they
\nagree to the terms of conditions provided in the service
\ncontracts they sign with the government.<\/p>\n
All Indonesian residents must contribute to this scheme,
\nincluding wealthy Indonesians and foreigners working in
\nIndonesia, groups that presumably already have good pension and
\nhealth coverage. For the National Health Insurance program,
\nformal sector workers must pay a 6 percent payroll tax, split
\nequally between employers and workers. Exact contributions from
\nself-employed and informal sector workers would be decided at a
\nlatter date, as is the case for the contribution rate of the
\npublic pension program.<\/p>\n
However, it is estimated that the total amount of combined
\npayroll taxes that have to be paid by employers and workers would
\nbe between 15 percent and 20 percent of a worker's salary. Thus,
\nthe Jamsosnas scheme could create a substantial burden for both
\nformal employers and workers, since they are the ones who would
\nbe responsible to pay for these schemes.<\/p>\n
The bill could make Indonesian business competitiveness even
\nless competitive, since it creates substantial new labor costs.
\nEmployers could respond to this law by reducing their workers'
\nsalaries to pay the required payroll tax, resulting in less take-
\nhome-pay for workers. This could reduce the income of low-middle
\nincome workers, who mostly rely on this income for their
\nlivelihood.<\/p>\n
There has been no known actuarial calculations that have
\nserved as a sound basis for determining the contribution levels
\nand benefits of this scheme, nor has there been any reliable
\neconometric analyses on the short and long-term impacts of this
\nscheme on the labor market, on Indonesia's business
\ncompetitiveness and on the Indonesian economy in general. Without
\nsuch analysis, the impacts of this scheme on the economy will
\nremain questionable and the adequacy of the proposed contribution
\nrate in paying actual program benefits will remain in doubt.<\/p>\n
The government's plan to subsidize the coverage of low-income
\npersons is also questionable. According to the draft law,
\nIndonesians whose income falls below the local minimum wage will
\nbe considered as \"low-income\" persons and therefore eligible to
\nreceive government subsidy.<\/p>\n
However, there is a substantial number of Indonesians who have
\nan income below the UMR rate, especially those who live in urban
\nareas. If there are too many Indonesians eligible to receive this
\nsubsidy, this would put an enormous financial strain on the
\ngovernment budget. If this issue is not addressed, it could
\nbecome another factor that could put the long-term sustainability
\nof the national social security program in doubt.<\/p>\n
The scheme also fails to address the problem of the rapid
\naging of Indonesians estimated to begin occurring in the next few
\ndecades. Demographic estimates have shown that the Indonesian
\npopulation aged 65 years and older will rise dramatically in the
\nnext few decades, from 9.3 million in 2000 to 46.9 million in
\n2050.<\/p>\n
The combination of a relatively young minimum retirement age
\n(55 years), low amount of minimum working years to qualify for
\npension (15 years) and a rapidly aging population that lives
\nlonger is a recipe for disaster for any public pension program,
\nand it seems that this proposed scheme would suffer from such a
\nfate.<\/p>\n
Additionally, since the elderly generally spend more on health
\ncare, most of the expenditures incurred by the National Health
\nInsurance scheme would be generated from them. If there are
\ninsufficient funds available in the National Health Trust Fund to
\npay for their care, the National Health Insurance scheme could
\nrun into serious financial problems.<\/p>\n
Finally, there is no requirement for service providers to
\nprovide health services to all National Health Insurance
\nparticipants who wish to seek treatment in their facilities.
\nThus, some providers might choose not to sign contracts with the
\ngovernment and therefore not accept patients covered solely by
\nthe National Health Insurance scheme.<\/p>\n
Given the above shortcomings, policymakers should
\nsignificantly revise this bill so that it will not create
\nadditional burdens for workers and businesses, is financially
\nsustainable both now and in the future and will allow all
\nIndonesians to choose their social security providers, whether
\npublic or private.<\/p>\n
The writer is a researcher with the SMERU Research Institute,
\na Jakarta-based public policy institute. The views expressed here
\nare solely his own.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/proposed-indonesian-social-security-reform-will-it-work-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}