Proposed Indonesian social security reform: Will it work?

Proposed Indonesian social security reform: Will it work?

Alex Arifianto, The SMERU Research Institute, Jakarta

Indonesia's social security program is currently undergoing a
major overhaul designed to make the existing system work better
for its beneficiaries and to extend social security coverage to
more Indonesians, both in the formal and informal sector. This
reform is being undertaken because the existing social security
scheme (Jamsostek) has failed to provide adequate benefits to
beneficiaries because of the low number of people it covers, its
low benefits and investment returns, and poor governance.

The Indonesian government has completed a draft law on the
reform of the National Social Security System, also known as
Jamsosnas, and it is expected to be approved by the Indonesian
legislature (DPR) before the election campaign starts this March.
The scheme proposed by the government is very comprehensive,
consisting of old-age pension, National Health Insurance and
workers' disability schemes. It will cover all Indonesian
citizens, regardless of whether they are formal workers, informal
workers or self-employed.

The old-age pension program is a defined-benefit social
insurance program operating under a pay-as-you-go mechanism. The
defined benefit of the old age pension is a percentage of the
average income for the previous year, between a minimum of 60
percent and a maximum of 80 percent of the local minimum wage
(UMR). Each worker will receive a guaranteed minimum pension in
the amount of 70 percent of the UMR.

The National Health Insurance program is designed to provide
comprehensive health benefits providing basic health services,
ranging from health services promotion to preventative treatment,
such as immunization and family planning. Both public and private
health providers can deliver these services, as long as they
agree to the terms of conditions provided in the service
contracts they sign with the government.

All Indonesian residents must contribute to this scheme,
including wealthy Indonesians and foreigners working in
Indonesia, groups that presumably already have good pension and
health coverage. For the National Health Insurance program,
formal sector workers must pay a 6 percent payroll tax, split
equally between employers and workers. Exact contributions from
self-employed and informal sector workers would be decided at a
latter date, as is the case for the contribution rate of the
public pension program.

However, it is estimated that the total amount of combined
payroll taxes that have to be paid by employers and workers would
be between 15 percent and 20 percent of a worker's salary. Thus,
the Jamsosnas scheme could create a substantial burden for both
formal employers and workers, since they are the ones who would
be responsible to pay for these schemes.

The bill could make Indonesian business competitiveness even
less competitive, since it creates substantial new labor costs.
Employers could respond to this law by reducing their workers'
salaries to pay the required payroll tax, resulting in less take-
home-pay for workers. This could reduce the income of low-middle
income workers, who mostly rely on this income for their
livelihood.

There has been no known actuarial calculations that have
served as a sound basis for determining the contribution levels
and benefits of this scheme, nor has there been any reliable
econometric analyses on the short and long-term impacts of this
scheme on the labor market, on Indonesia's business
competitiveness and on the Indonesian economy in general. Without
such analysis, the impacts of this scheme on the economy will
remain questionable and the adequacy of the proposed contribution
rate in paying actual program benefits will remain in doubt.

The government's plan to subsidize the coverage of low-income
persons is also questionable. According to the draft law,
Indonesians whose income falls below the local minimum wage will
be considered as "low-income" persons and therefore eligible to
receive government subsidy.

However, there is a substantial number of Indonesians who have
an income below the UMR rate, especially those who live in urban
areas. If there are too many Indonesians eligible to receive this
subsidy, this would put an enormous financial strain on the
government budget. If this issue is not addressed, it could
become another factor that could put the long-term sustainability
of the national social security program in doubt.

The scheme also fails to address the problem of the rapid
aging of Indonesians estimated to begin occurring in the next few
decades. Demographic estimates have shown that the Indonesian
population aged 65 years and older will rise dramatically in the
next few decades, from 9.3 million in 2000 to 46.9 million in
2050.

The combination of a relatively young minimum retirement age
(55 years), low amount of minimum working years to qualify for
pension (15 years) and a rapidly aging population that lives
longer is a recipe for disaster for any public pension program,
and it seems that this proposed scheme would suffer from such a
fate.

Additionally, since the elderly generally spend more on health
care, most of the expenditures incurred by the National Health
Insurance scheme would be generated from them. If there are
insufficient funds available in the National Health Trust Fund to
pay for their care, the National Health Insurance scheme could
run into serious financial problems.

Finally, there is no requirement for service providers to
provide health services to all National Health Insurance
participants who wish to seek treatment in their facilities.
Thus, some providers might choose not to sign contracts with the
government and therefore not accept patients covered solely by
the National Health Insurance scheme.

Given the above shortcomings, policymakers should
significantly revise this bill so that it will not create
additional burdens for workers and businesses, is financially
sustainable both now and in the future and will allow all
Indonesians to choose their social security providers, whether
public or private.

The writer is a researcher with the SMERU Research Institute,
a Jakarta-based public policy institute. The views expressed here
are solely his own.