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.