Creating a better social security system for Indonesian workers

Creating a better social security system for Indonesian workers

Alex Arifianto
Jakarta

The Indonesian government is currently undertaking a major
reform of the country's social security system to provide social
security coverage for all citizens, regardless of their income or
employment status.

The social security programs offered by the government would
be quite comprehensive, consisting of old-age pension, National
Health Insurance, workers' disability and death benefit schemes.
Starting this week, a bill drafted by a government task force on
social security reform will be deliberated by the House of
Representatives and is expected to be passed into law by the end
of this year.

While the government's effort to extend social security
coverage to all Indonesians is commendable, many stakeholders,
including employers, workers and independent experts, have
questioned the feasibility and sustainability of the government's
proposal. They point out that the financial feasibility of this
program has not been comprehensively analyzed, that the
government has not been forthcoming in detailing the tax rates
and the benefits that would be provided by the proposed scheme
and that the long-term sustainability of the program is in doubt,
which could lead to substantial budget deficits in the future.

The most glaring flaw perceived by critics of the government's
proposal is that it disregards the role of free and competitive
markets in providing social security benefits for Indonesians.
According to the bill, social security provision would continue
to be the sole responsibility of the government. The government,
through monopolistic social security corporations of its
creation, would continue to make decisions on how the money was
collected, managed, invested and distributed to beneficiaries.

However, individual workers would not be allowed to
participate in the decision-making over the social security fund,
even though the money put into the national social security fund
would be their own. At a recent seminar, it was revealed that
workers and the labor unions representing them have little
confidence in publicly run social security schemes, given past
misuse of social security money by the entities managing it.

Similar problems have also been found in publicly run social
security schemes in other countries, mostly in Latin America and
Eastern Europe. These countries' experiences show that it is not
a good idea for the government to both regulate and operate the
national social security scheme at the same time.

A separation between these functions is needed in order to
have a truly functional social security system that works for
employees.

Advocates of social security reform have proposed an
individual social security account scheme as a solution to fix
the problems affecting the public social security schemes
described above. In this scheme, workers and employers' social
security contributions would be earmarked for each individual
account. Each worker would be given a choice to manage their own
account either by themselves, with the assistance of a private
financial management firm, or through their employers.

Private management of social security funds would improve the
performance of workers' social security savings, because they
would be able to make investment decisions without political
intervention from the government. This would result in higher
rates of return for workers. Private managers would be able to
maximize the return on the funds they managed by optimally taking
into account both returns and risks of available investment
schemes, because they would not be constrained to make
investments in assets that have low returns and low risks, such
as bank deposits or government bonds.

Individual accounts would put maximum control over the
investment management of social security funds in the hands of
individual workers. Instead of entrusting their investment to a
nontransparent and unaccountable government monopoly, workers
themselves would have full control over their retirement
investment and would be free to chose investment managers and
plans that suited their tastes and preferences.

In this scheme, the role of the government would be limited to
issuing and enforcing appropriate regulations to safeguard the
workers' social security savings. Such regulations should be kept
at a reasonable level to prevent government intervention in the
management of social security funds, while at the same time
should ensure the safety of such funds from possible fraud, waste
and abuse.

In Asia, the private social security system has been adopted
in Hong Kong, while China is considering converting its public
social security fund into a private one.

In sum, private social security schemes are now recognized
worldwide as an effective way to provide social security coverage
for workers. Given this global trend, Indonesia should seriously
consider it, since the private social security scheme has been
proven very successful in increasing economic growth, investment
returns and fund governance. This scheme also has received broad
support from businesses, labor unions and workers.

The writer (aarifianto@smeru.or.id) is a researcher with the
SMERU Research Institute, a Jakarta-based public policy
institute. The views expressed here are solely those of the
author.