New RI social security law: A blessing or curse for workers?

Alex Arifianto, Jakarta

On Sept. 28, 2004, the House of Representatives (DPR) endorsed the bill on the National Social Security System (popularly called the RUU SJSN). With its endorsement, the bill is scheduled to become law within a month.

Among key features of the new law is that it mandates the creation of several social security schemes for citizens: Old-age pension, old-age savings, national health insurance, work-injury insurance, death benefits, and severance payments for laid off workers.

The law also mandates that, within the next decade or so, social security coverage should be expanded to cover all citizens, including the informal sector, the unemployed, and the poor.

The schemes above would be largely financed by payroll taxes imposed on employers and workers, mostly in the formal sector. In addition, the government will subsidize the contributions of the poorest citizens.

However, while the new law seems to be a very good law on paper, especially given that Indonesia had no comprehensive social security policy until the law was enacted, it was opposed by most stakeholders related to social security issues -- including employers' associations, labor unions, pension and health care companies, and independent experts. Why is this the case?

First of all, stakeholders believe that the drafting process of the law was not open and transparent. Many felt they were excluded from the deliberation of the draft law, and even when the drafters consulted them, they did not incorporate their views.

More importantly, stakeholders believe that the payroll tax required to finance the various social security schemes is set at a very high rate. While exact figures are not available, it is estimated that the total amount of the tax rate would be between 20 to 25 percent of workers' payroll. This is a considerable amount for many Indonesian workers, especially those in the lower-middle income category.

In comparison, the social security tax rate in Thailand is only about 5 percent of workers' payroll, and in the Philippines, it is about 13 percent of workers' payroll.

Since Indonesia's tax rate is much higher than that of neighboring countries, it is feared that Indonesia would continue to lose its business competitiveness in relations with our neighbors, driving more companies to relocate to these countries and leaving more of our workers jobless.

In addition, many questioned whether the social security scheme would be sustainable in the long run, that is, it is able to pay its promised benefits to all participants in full. In order to be considered financially sustainable, a social security scheme should be able to pay all promised benefits for up to the next 75 years.

Additionally, given that demographers have estimated that, by the year 2050, about one-third of all Indonesian citizens would be aged 60 years old, or older, there would be a great demand for social security benefits from this population within the next few decades.

Unfortunately, we cannot determine whether the Indonesian scheme would be financially sustainable, since no actuarial cost- benefit analysis has been performed for the Indonesian plan. Thus, no one knows for sure whether the proposed contribution would be adequate to fully finance these benefits once many Indonesians reach old age or retire.

Many social security schemes throughout the world are in danger of becoming insolvent due to the population aging phenomena that have occurred in most countries in the world. For instance, in the Philippines, the number of new retirees eligible for pension benefits more than doubled in the 1990s. This caused the funds accumulated in the country's social security trust fund to decline significantly, so that it is now predicted that the fund will be completely depleted by the year 2015.

It is also estimated that the hidden public pension debt in the Philippines is about US$21 billion (Rp 200 trillion). We could predict that, should the Indonesian scheme becomes insolvent, the Indonesian government, and eventually Indonesian citizens, would be obliged to pay a substantial number of new debts that could amount to be up to three times larger than the debt incurred by the Philippines' social security system (around $63 billion or about Rp 598 trillion).

Since Indonesia already has a large amount of public debt (estimated at $136 billion or around Rp 1,292 trillion) as of March 2004, this country cannot afford an extra Rp 598 trillion in additional debt.

Finally, stakeholders were concerned because, according to the law, social security provisions would continue to become the monopoly of social security state enterprises, such as PT Jamsostek, PT Taspen, PT Askes, and PT Asabri. Given that many of these enterprises have significant governance problems in their management, stakeholders were concerned that their social security contribution would not be well managed by these companies.

Instead, they prefer a more competitive system in which all companies, both government and privately owned ones, could provide social security coverage for all Indonesians, after they have met selected criteria set up by the government.

In conclusion, while the new social security law is the first step in providing adequate social security benefits for all Indonesians, it needs to be amended further, so that the schemes proposed by the law are more transparent and financially sustainable. If this law is revised, the views of all stakeholders involved should be heard and incorporated into the amended law, including their demands for a more accountable, affordable, sustainable, and competitive social security system.

The writer (aarifianto@smeru.or.id) is an economist with the SMERU Research Institute, a Jakarta-based public policy think tank. The views expressed here are solely his own.