Indonesia needs to reform its pension system

Indonesia needs to reform its pension system

By Stanislav Velinov

This is the second of two articles on Indonesia's pension
system.

HONG KONG: While still employed, both employer and employee
benefit from tax evasion. This is why, law enforcement is the
main prerequisite for the success of the implementation and
functioning of the pension system. In addition, it also
determines how to distribute the pension insurance burden between
the social partners.

The burden on the employee can be compensated by readjustment
of the wages and flexible taxation.

The pension insurance burden on the employer in general is
bigger and in addition he has to make compensation for medical
treatment, clothing, social benefits, additional remuneration for
working in harmful environment, etc.

However, the taxation on his revenues may open a legal way for
balancing his expenditures on salaries and social security. In
some countries, government employees are subject to special rates
of pension insurance which are different than the mass, but these
countries are an exception.

When speaking about the pension insurance burden, logically we
have to think about the volume of the burden or in other words
the percentages which the legislation must impose.

In this regard, there are many factors that must be considered
starting with the average life expectancy for both sexes,
migration, unemployment rate, demographic problems, inflation,
interest rates, other politic and economic forecasts on the
social sphere, etc.

Once a reliable analysis is ready, the legislators have to
determine if they want to adopt a scheme with early retirement
and smaller pensions, later retirement and bigger pensions or
another alternative. Early retirement and high pension
compensation for the mass is in general impossible though
politicians often speculate with such statements especially
during election campaigns.

However, exceptions can be made for a special category of
employees working under harmful conditions and environment.

Why is early retirement and big compensation impossible?
Because big compensation means higher contributions which will
decrease the collection efficiency and increase tax evasion.
Meanwhile it may provoke, lower or unregulated employment. In
this line, the political decision, based on the parameters listed
plus a number of other sociopolitical indicators should adopt
such a system which best suits the national working power.

It should determine the right retirement age (working life)
plus volume of contribution made to the pension system.

The political decision has many pros and cons and if we have
to group them into two main groups we can see the economic
approach on one side demanding higher retirement age in view of
the pension funds multiplication and on the other side stands the
political approach which provides for early retirement, thus
reduction of some compensation (gradually increasing in advanced
age) and ensuring new employment opportunities for the younger
generations.

Another major point in the pension system reform that must be
addressed is the dilemma of making the new system socially
acceptable at the cost of financial stability or making it more
secure and less profitable. The political decision should
represent the best compromise between these standpoints.

What is the situation with the voluntary pension insurance?
The voluntary pension insurance, being the third pillar of the
system represents people's motivation and initiative to invest in
long-term plan. Furthermore, the utilization of such facility
indicates the monetary potential of the average employed citizen
and his living standard.

In this view, when choosing a voluntary pension fund, there
are two approaches. The first one is known as the "collective
approach" where the trade union leader or a representative of the
collective negotiates conditions and chooses a fund and the
second approach is the individual one, where everyone is free to
choose a pension fund himself.

The selection of a pension fund is extremely important because
a wrong choice may lead to unsatisfactory results or even loss.

Focusing on the most negative scenario, named "loss", the
legislators, through the law, impose such regulations that
optimally minimize the risk and the ratio of the loss.

However, theoretically, even in the most secured pension
system a fund failure is possible and this is why the right
choice is very important.

Going back to the old maxim that high profit is commensurate
with high risk, the return from our investment is one of the
crucial factors but not the only one. The other factors are
background, where and how the fund invests, what risks it takes
and what strategy it follows.

On the other hand, we are obliged to say that in countries in
transition where the mass is not well introduced to investment
practices, the possibility for manipulation with negative results
is very high.

People are often lured by promises of high returns,
compensation insurance and medical packages, lucky
draws, etc. but expectations must not exceed reality. As any
other investment, it is advisable to choose a reliable asset
manager prior to choosing a voluntary pension fund.

Actually the manager is the one who can analyze for its
customer the existing market alternatives and point out which is
the best one.

The writer is executive director of Tat On Investments Ltd,
Hong Kong and a private asset manager.