Toward a better social security system

Alex Arifianto, Jakarta

The Indonesian government is currently undertaking a major reform of the country's social security system to provide social security coverage for all citizens, regardless of their income or employment status.

The social security programs offered by the government would be quite comprehensive, consisting of old-age pension, National Health Insurance, workers' disability and death benefit schemes. Starting this week, a bill drafted by a government task force on social security reform will be deliberated by the House of Representatives and is expected to be passed into law by the end of this year.

While the government's effort to extend social security coverage to all Indonesians is commendable, many stakeholders, including employers, workers and independent experts, have questioned the feasibility and sustainability of the government's proposal. They point out that the financial feasibility of this program has not been comprehensively analyzed, that the government has not been forthcoming in detailing the tax rates and the benefits that would be provided by the proposed scheme and that the long-term sustainability of the program is in doubt, which could lead to substantial budget deficits in the future.

The most glaring flaw perceived by critics of the government's proposal is that it disregards the role of free and competitive markets in providing social security benefits for Indonesians. According to the bill, social security provision would continue to be the sole responsibility of the government. The government, through monopolistic social security corporations of its creation, would continue to make decisions on how the money was collected, managed, invested and distributed to beneficiaries.

However, individual workers would not be allowed to participate in the decision-making over the social security fund, even though the money put into the national social security fund would be their own. At a recent seminar, it was revealed that workers and the labor unions representing them have little confidence in publicly run social security schemes, given past misuse of social security money by the entities managing it.

Similar problems have also been found in publicly run social security schemes in other countries, mostly in Latin America and Eastern Europe. These countries' experiences show that it is not a good idea for the government to both regulate and operate the national social security scheme at the same time.

A separation between these functions is needed in order to have a truly functional social security system that works for employees.

Advocates of social security reform have proposed an individual social security account scheme as a solution to fix the problems affecting the public social security schemes described above. In this scheme, workers and employers' social security contributions would be earmarked for each individual account. Each worker would be given a choice to manage their own account either by themselves, with the assistance of a private financial management firm, or through their employers.

Private management of social security funds would improve the performance of workers' social security savings, because they would be able to make investment decisions without political intervention from the government. This would result in higher rates of return for workers. Private managers would be able to maximize the return on the funds they managed by optimally taking into account both returns and risks of available investment schemes, because they would not be constrained to make investments in assets that have low returns and low risks, such as bank deposits or government bonds.

Individual accounts would put maximum control over the investment management of social security funds in the hands of individual workers. Instead of entrusting their investment to a nontransparent and unaccountable government monopoly, workers themselves would have full control over their retirement investment and would be free to chose investment managers and plans that suited their tastes and preferences.

In this scheme, the role of the government would be limited to issuing and enforcing appropriate regulations to safeguard the workers' social security savings. Such regulations should be kept at a reasonable level to prevent government intervention in the management of social security funds, while at the same time should ensure the safety of such funds from possible fraud, waste and abuse.

In Asia, the private social security system has been adopted in Hong Kong, while China is considering converting its public social security fund into a private one.

In sum, private social security schemes are now recognized worldwide as an effective way to provide social security coverage for workers. Given this global trend, Indonesia should seriously consider it, since the private social security scheme has been proven very successful in increasing economic growth, investment returns and fund governance. This scheme also has received broad support from businesses, labor unions and workers.

The writer (aarifianto@smeru.or.id) is a researcher with the SMERU Research Institute, a Jakarta-based public policy institute. The views expressed here are solely those of the author.