Mandatory contributions to social security

Mandatory contributions to social security

Hasbullah Thabrany, Jakarta

A recent article by Alex Arifianto that appeared in The
Jakarta Post criticized the National Social Security System
(SJSN) as disregardful of the role of a free and competitive
market, the budget deficit, individual accounts and management of
monopolies. Other observers have argued that the introduction of
the SJSN may affect Indonesia's attractiveness to investors and
would thus influence economic growth.

Most of these criticisms, however, come from a lack of
comprehension of the SJSN and the basic characteristics of a
social security system.

Reading the criticisms, one might be impressed that the
government had behaved stupidly, resulting in a very vague social
security system or additionally burdening employers and employees
in such a way as to make the latter suffer the most.

Is the system so bad?

Conflicting interests always exist between the public and the
private sectors, and even within the private sector. A classic
example is that employees typically demand higher wages and
benefits, such as social security and workers' compensation,
while employers tend toward reducing wages and benefits in order
to maximize profits.

Several groups, such as the International Chamber of Commerce,
oppose mandatory social security contributions by employers and
employees, and instead encourage that employers and employees
establish or select their own schemes.

The words "mandatory" or "compulsory" may seem horrible, but
without mandatory contributions, people will be unable to prepare
adequately to anticipate the future. Most people -- not just in
Indonesia, but all over the world -- are unaware of their future
needs and therefore will not prepare nor demand adequate
coverage.

In Indonesia, for example, the Pension Fund Law was passed in
1992, but after 12 years, only about three percent of employees
in the formal sector are covered. Most of those employers that
have established a pension fund are state enterprises, because
contributions to the fund is basically the taxpayers' money.
Meanwhile, very few private and foreign companies provide pension
funds for their employees.

Why is this the case? Employees are not aware of future
financial risks that might come as they age and retire, and
employers are not interested in spending more for their
employees. This is the nature of the voluntary scheme, which is
the basis of the market mechanism.

On the other hand, the national Jamsostek retirement plan,
which is mandatory, covers more than 60 percent of employees in
the formal sector. Unfortunately, the Jamsostek plan does not
mandate a public pension fund.

The nature of social security is mandatory, because it was
conceived with a design to overcome a lack of demand -- so social
security is the opposite of market concept, which is based on
demand and individual choices, and is voluntary. Thus, it does
not make sense to apply market mechanisms to social security,
that is, by leaving employers and employees to choose their own
coverage.

It is also possible to have a monopolistic social security
system, such as those of the U.S., Korea, Canada, Australia, the
Philippines and Thailand, to name a few. Monopolistic systems do
not operate according to market mechanisms, and are a means to
administer mandatory arrangements, such as taxes.

Resorting the administration of a social security system to
market mechanisms would ensure the failure of the system, because
social security is designed to overcome market failures to
provide security for all.

Therefore, it does not make sense to maximize individual
contributions in a national social security scheme by giving a
financial manager the freedom to manage individual accounts -- as
was suggested by Arifianto -- because the main goal of social
security is to secure a fund for the future and to protect loss
of income for the general public.

The emphasis of a social security system is to achieve social,
or group, goals while the emphasis of the market is to maximize
individual goals. Maximizing individual or group yields can be
conducted in a private pension fund as the second pillar of
income security.

We must keep in mind that the number of employees who really
understand and need higher yields is very small: Of the local
labor market, less than 5 percent have a university education.
Therefore, leaving employees to decide upon their individual
accounts as the first pillar of social security will satisfy only
a minority, presumably less than 5 percent of social security
members.

The social security law must favor the majority, but it may
proscribe that the funds of the first pillar of social security
may be invested in market instruments to produce higher yields
for all members.

Lessons from the Chilean market model, which has allowed
private financial managers to manage some funds since the early
1980s, teach us that a balance in the primary goals of income
security and redistributive incomes have not been optimally
achieved.

The essence of the SJSN is to create a common social security
platform for various groups, namely public servants, private
employees and workers in the informal sector. The second key aim
of the national scheme is to transform social security
organizations from being profit-oriented to quasi-private, not-
for-profit organizations, or BPJS.

The third aim is to put stakeholders in control over policy
and management of social security through the formation of a
board of trustees consisting of five representatives each from
employers and employees.

The fourth aim is to mandate the government's fulfillment of
its obligation to the poor by integrating health care benefits
into the national scheme so that there is no discrimination.

A common mistake made by its critics is that the National
Social Security System will provide benefits in addition to that
of the existing Jamsostek scheme. It will not: No duplication of
contributions or benefits is allowed under the SJSN.

In addition, many critics mistakenly assume that the scheme
will require employers to provide benefits to all citizens
regardless of their contributions, but only those contributing
parties, or employees, will receive benefits. Non-contributing
citizens are not eligible for the benefits.

Lastly, many critics are unaware that a social security scheme
is a dynamic system that pools and disburses benefits, so that
solvency and liquidity will be always maintained; there is no
reason to fear that the system will face financial problems if it
is managed by a government or a quasi-private agency.

The writer is Professor of Public Health at the University of
Indonesia.