Social Protection Rebuilding In Indonesia - Process And Challenges

8/6/2019 Social Protection Rebuilding In Indonesia - Process And Challenges

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SOCIAL PROTECTION REBUILDING IN INDONESIA: PROCESS AND

CHALLENGES1

Prof. Dr. Bambang Purwoko, MA

Member of National Social Security Council (DJSN)Pancasila Universitys Study Program on Economic Doctorate

Abstract: This paper exhibits the social protection rebuilding in Indonesia as the solution to

the long financial crisis of 1997 causing to the unemployment problems with more than 10

million people included to the increasing number of poor population at more than 70 million.

The current social security system as referred to jaminan sosial tenaga kerja (Jamsostek) ascontributory employee social security is designed to provide the formal sector employees with

income compensation including benefits in kind in the event of work-injury, sickness,

premature death and retirement. As a response to the poverty reduction strategy, the extensionof coverage of Jamsostek across the informal economy faces severe problems due to poor-

employment backdrop. The provision of free health services by the government for poor

population which began in 2005 until recently is part of the poverty reduction strategy in theshort-run.Methodology used in this study is to identify the current problems in social securitycoverage following to explore the causal factors pertaining to low compliance and weak

enforcement. The outcome of this study shows the importance of the next social security

carrier to have power on law enforcement while establishing pension plan as povertyreduction strategy in the long run. In case of the difficulties in pension establishment, the

transformation of Jamsosteks old age security to pension plan is also required as a mandate

of Law No. 40 of 2004 on National Social Security System.

1. Introduction and Background

The effect of the 1997-1998 Asian financial crisis on the national economydeteriorated the currency of rupiah (IDR). The economic-growth rates dropped from

an average of 6-7% in the 1990s to the negative rate of 13.5% in 1998 then recovered

to an average of 5.8% over 2000-2007. The currency rate of IDR in exchange of USD

1 also dropped from IDR 2,200 in 1996 to IDR 10,000 in 2008 due to the 1997devaluation effect which continued in 2008. The impact of the 2007 global financial

crisis on the employment sector was massive-layoff in the manufacturing sector

contributing significantly to numerous amounts of people seeking jobs in the informaleconomy. Regardless of the economic crisis recovery, it seems hardly possible forIndonesia with continuing depreciation of rupiah until recently to succeed in poverty

reduction strategy. Empirically, Indonesias national development had long beenoriented toward an economic growth model in the 1990s but the development-

1

This paper is prepared for the presentation to GTZ Conference on growth quality on social protection

system held in New Delhi on 14-18 September 2009. Direct correspondence to the author: University

of Pancasilas Postgraduage Programme: No. 7 Borobudur Road, Jakarta 10320 email:

[email protected] and [email protected].


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outcome failed to enhance social welfare of the community and promote theeconomic well-being

2. The failure in achieving economic well-being was the growth

oriented model with no equity followed by the privatization of state firms on the basis

of market approach. The privatization effect of state firms on the national economywas massive layoff of employees which added indirectly to the unemployment. Theunemployment problem with no solution to the reemployment of layoff people is the

poverty escalation.With respect to poverty reduction strategy, the provision of free-health care for

the poor is funded by the national budget and the empowerment of vulnerability toself-employed workers is fostered continuously. The current poverty reduction

programs throughout the provisions of free health care (Jamkesmas), unconditional /conditional cash transfers (BLT / PKH) and subsidized rice (raskin) are heterogenous.

However, pro-poor policy seems to be implemented tentatively, for instance the

provision of conditional / unconditional cash transfers to be provided for the poor as

the compensation due to the pricing-up of the world fuel oil. There is tendency to stopthe provision of conditional / unconditional cash transfers in line with the stability of

the world fuel oil prices. Accordingly, the rising-unemployment which exceeded

more than 10 million peoples added to vulnerable group amounting to about 124.5

million (55% of population in 2007) has contributed to poverty levels at 35.10 millionin 2005, 54.1 million in 2006 and 76.4 million in 2007 (Jamsostek-ILO, 2008).

Additionally, the main causal factor contributing to the depreciated rupiah was the

speculative / rising demand of USD for making arbitrage in the short-run including

the dependency on the imports of consumption, inventory and capital goods.

However, another factor causing to rising poverty was the effect of the 2004 Tsunami

disaster, the economic and demographic changes, continuing effects of the economic

crisis (Suharto, 2009).The effects of depreciated rupiah, unemployment and natural disaster on the

national economy were hazard factors to the current social security system. However,

the solution to the above problems is to consider the need for social protection systemto safeguard the current social security system: for example to provide free health

care for the poor, to prepare means-test for the identification of the poor, to empowerthe vulnerability, to stop the exploitation of children dropouts and to pursue stimulus

package for the informal economy including the extension of universal coveragewhich need to be coordinated among the respective government institutions

concerned with social security in the context of poverty reduction strategies (GTZ andBappenas, 2008). Empirical findings indicates that the implementation of the current

social security system in Indonesia has not been directed to the improvement ofemployees wage quality, the portability of benefits, the job-creation in the formal

economy and the autonomy of law enforcement assigned to social security carrier.The objective of this study is to identify the current problems of implementing

social security coverage which needs to be attached with the target of economic well-being and political will of the government to extend universal coverage as mandated

by Law No. 40 of 2004 on National Social Security System (NSSS). It is self-

governance of administering social security system by several agencies to meet a

2The economic well-being is defined as social indicators measured in term of employment rate,

median income of the people and access to health services (see Wharton and Church II, 2009).


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floor protection for the whole people of Indonesia (Law No 40 of 2004). Theextension of the social security coverage to excluded population had long been

proposed but failed due to the inadequacy in public finance. Methodology used in this

study refers to survey conducted in Jamsostek and Taspen over 2005-2007 regardingthe difficulties in the extension of social security coverage for the informal economyin Indonesia. We explored the employment and poverty problems as a basis for the

job-creation, the implication of good-governance both for public and private sectorsand social security rebuilding. However, focus on this study is directed to identify

main problems in the implementation of compulsory pension plan in the context ofLaw No. 40 of 2004 on National Social Security System and the tentative solution to

these problems will be the transformation of Jamsosteks old age security to pensionplan.

Organization of this study is divided into seven (6) sections:

a. The first section of the study is the introductory remark on the deterioration of the

national economy which hit the employment and finally affected the interruptionof social security coverage.

b. The second section identifies problems which relate to the difficulties in

extending coverage to excluded population, low compliance and weak

enforcement to wage employees as potential members of social security system.c. The third section of this study presents the need for national social security

system enacted by Law No 40 of 2004 with the objective of extending universal

coverage as a basis for poverty reduction strategy in the long run.

d. The fourth section of the study provides an overview of free health services for

the poor population as pilot project under the direct supervision of the Health

Department. There is confusing focus on the implementation of free health

services for the poor population under the financing of national state budget associal assistance model and or the provision of contributory assistance to the poorin health care under the national social security system.

e. The section five (5) elaborates the financing of pension plans for governmentemployees which applied to tax based pay as you go system and some difficulties

in establishing pension plan for the private sector employees occurred because oflow wage followed by short horizon to work with no employment security.

f. The sixth section of this study will lead a discussion on the need for integratedsocial protection system which requires the function of labor market to reemploy

the unemployed. Additionally, the transformation of the informal economy to wellorganized firms is absolutely required to extend social security coverage. Finally,

the conclusion and recommendation of this study is presented to give some usefulinputs both for the Indonesian government and for enhancing social security

research

Last but not least, social security rebuilding in Indonesia needs to be focused onthe assignment of law enforcement power to Jamsostek responsible to extend the

coverage across the labor-force. The amendment of the carriers legal entity as state

firms is absolutely required to have power in law enforcement as a key-success inimplementing compulsory social security programs despite the achievement of social

security for all still to dream for all.


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2. Problems Identification in the Current Social Security

Social security provides income maintenance for the working population againstsocial-economic risks such as work-injury, sickness-maternity, invalidity, prematuredeath, unemployment and old age. Social security system shall include social

assistance which provides income-support for the poor and near poor population3

throughout means-test application (see the 1998 Constitution of ISSA and ILO

Convention No 102 of 1952). It depends on the economic conditions characterized bystable employment for the working population to work for their income in a long time

horizon. Social security shall be established by the contributions of the employer-employee called as contributory social security, while tax-financed program as social

assistance is a supplement. Tax-financed program shall be applied to means-test for

the near population. The survival of contributory social security depends upon the

large number of employees-workers working in the formal economy for regular wage.Difficulties in implementing social security in Indonesia in the post financial crisis of

1997 were numerous amounts of people working in the informal economy4 with an

average of 70% of active population (see Table 1).

Table 1. Active Population, Coverage of Jamsostek and Compliance Rate

Million of person 2005 2006 2007

1. Population2. Active population

3. Employed population

4. Unemployed (2)-(3)

5. Wage employees in formal economy6. Workers in the informal economy

219.14105.85

93.95

11.89

36.1069.75

222.70106.50

95.45

11.05

29.7076.80

226.32109.90

99.90

10.00

30.9079.00

7. Free health care (Jamkesmas) 35.50 54.10 76.40

8. Total coverage of Jamsostek

a. Inactive members

b. Active membersc. Workers in the informal economy

13.10

7.840.65

21.59

15.36

7.720.78

23.86

15.78

7.940.85

24.22

9. Employers compliance to Jamsosteka. in term of employed population

b. in term of wage employees

22.98%

59.80%

24.99%

80.34%

24.24%

78.38%

Source: Central Board for Statistics (2008), Jamsostek (8) and Author (9)

3The understanding of poor population by the World Bank is a person whose income at less than USD

2 per day; the Central Board for Statistics defines poor population using the need for at least 2,100calorie and the coordinating team for the poverty alleviation concluded to any persons having monthly

income per capita at IDR 166,697 (USD 16.67). The near population includes vulnerability groups

including those having monthly income at less than minimum wage.

4 The informal economy is self-employed, unorganized groups which employ child workers including

family firms with little capital involved and apply to the labor intensive (see Angelini and Hirose,

2004). The formal economy is a well-organized economic activity which employs workers with regularwage based on a work contract.


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Table 1 presents the active population, total coverage of employee social security[jaminan Sosial Tenaga Kerja (Jamsostek)] and the rate of employers compliance to

Jamsostek. During 2005-2007, the active population accounted for an average of

48.2% to total population with an average increase of 2.08 million (1.95%); almost90% of active population were employed in the formal and informal economy whilethe remainder at about 10% or with an average of 10.98 million were unemployed.

The composition of employees working in formal economy to active population wasrespectively at 34.10% in 2005; 27.88% in 2006 and 28.12% in 2007 while the rest at

an average of 70% of active population worked for the informal economy due to thelack of employment opportunities in formal economy. Due to the numerous amount

of active population at 70% working in the informal economy with uncertain receiptof less-pay, the coverage of Jamsostek was very low at 21.59 million in 2005; 23.86

million in 2006 and 24.22 million in 2007. The total coverage of Jamsostek consisting

of inactive members at 63.39%; active members at 33.81% and the informal economy

at only 2.8% averagely was the failure system in achieving the target of economicwell-being. Inactive membership in Jamsostek at more than 60% includes the

numbers of employees or workers having withdrawn their old age benefits due to

layoff, retirement, premature death including the numbers of employers as Jamsostek

members having financial insolvency and bankruptcy. Due to this unfavorableemployment situation, Jamsostek faces a severe problem in the extension of

(universal) coverage. Another legal problem currently faced by Jamsostek is low-

compliance and contribution evasion. As noted, the employers compliance rate with

Jamsostek as compulsory program was 24.07% as compared to total active population

and 72.84% averagely as compared to total wage employees.

The coverage of Jamsostek is compulsory for any employers employing at least

10 persons and or having monthly payroll of IDR 1 million (USD 100) based onLaw No 3 of 1992 needs to be amended to include the employment of one employee.Definitely, Jamsostek is risks mitigation by providing income compensation and

benefits in kind for the employees including their families in the event of work-injury,sickness-maternity, premature death and old age causing to the reduction or loss of

income. The coverage of health care (JPK-Jamsostek) is based on opt-out coveragefor any employers which provide better health care better than Jamsotek are exempted

from the compulsory membership with no means-test application. Most employersconsidered JPK Jamsostek as a basic provision of health care for low income groups.

However, JPK-Jamsostek is designed as managed care for all members. Opt-outcoverage in social health insurance is a kind of inconsistent regulation which needs to

be removed in the long run in order for all employees to have access to health care.Thabrany (2008) argued that the concept of social health insurance has been

poorly understood in Indonesia. Most people understand social health insurance as

program for the poor. This misunderstanding has affected difficulties in introducing

social health insurance in Indonesia; even though social health insurance program for

the civil servants known as Askes has long been implemented since 1968. A social

health insurance program for the private sector employees known as JPK Jamsostek

has also been implemented since 1992. It is therefore easily understood that several

International Organizations, such as GTZ, European Union, ILO, and WHO provide


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technical assistances to Indonesia to expand health insurance through social securityreform.

The uniqueness of Jamsosteks old age security, according to Article 14 of Law

No 3 of 1992, may be paid out as lump-sum payment like provident fund andtransformed to pension plan as retail pension despite lump-sum payment to be themain preference. The funding of Jamsostek programs is based on the employer-

employee contribution at 10-13% of wage to the extent to which it promises majorincome compensation at 48-56 times wage due to death and totally disability because

of work-injury. Another cash benefit annexed with income compensation is thewithdrawal of saving account as lump-sum payment added to monthly conditional

cash transfer at IDR 200 thousand (USD 20) for two (2) years duration. Death and

funeral benefits at IDR 12.5 million (USD 1250) are given to the heirs and suchbenefits are still portable to retired employees who died within 6 months from the

date of retirement. However, the withdrawal of saving account can be attached withlayoff of employees provided that 5 years and 1 month coverage shall be met.

The implementation of Jamsostek has been directed to the regulatory frame-workof manpower with the hope of compliance control to be on the right track. However,

the main problems to implement Jamsostek are poor compliance and weak lawenforcement despite the Government Regulation No 14 of 1993 to stipulate a fine of

2% contributions to the employer having late payments. Another punishment relatedto the case of fraud is penalty of IDR 50 million (USD 5000) and or 6-month

imprisonment which can be charged to employers violating Jamsostek law but this

clause is seldom applied. Even though, there was legal obstacle concerning control of

compliance as previously handled by labor inspectors but it was still applied.

Currently it cannot be continued since decentralization of power to local

governments. There were problems for local governments to foster labor inspectorsthemselves due to the lack of human resources ready to join exclusive training for

social security inspection.

There are conflicting issues in the implementation of Jamsostek which should

comply with social security principles but clauses of Law No 3 of 1992 have been

much influenced by the regulatory frame-work of manpower: for instance the

transformation of Jamsosteks old age security to severance pay. Severance pay is

not the domain of social security except unemployment insurance which providesretail cash benefit of 50-70% wages for layoff workers for one-year duration prior to

enter labor market. Unemployment insurance is not applied in Indonesia and not

adopted in Law No 3 of 1992 due to the absence of the role of labor market in labor

mobility. Basically, the withdrawal of Jamsoteks old age security is eligible toemployee achieved at age 55 years or having premature-death but then it can betolerated by the Government Regulation No 14 of 1993 to pay severance pay for

layoff employees provided to have 5-year coverage in Jamsostek. Additionally, thereis social security system for the government employees, viz. civil servants and the

military and police personnel currently being participated in health care, pension planand death benefit. The administration of the respective program is assigned to

Asuransi Kesehatan Sosial (Askes) as social health insurance carrier for civil servantsbased on the Government Regulation No 69 of 1991; Tabungan dan pensiun pegawai

negeri sipil (Taspen) as a pension plan carrier for the civil servants based on Law No


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employers participation, the total contributions were not affordable financially bymost workers in the informal economy. In practice, the employers comply with

making social security contributions on behalf of the employees which can collect

efficiently in the formal economy but not for the informal economy. Efficientcollection of contribution to the informal economy is difficult to make with nopermanent address of the informal economy.

b. The portability of benefits as designed for the formal economy does not match

with the needs of the informal economy workers, because of their financialconstraint which cannot be participated into all programs. It is preferable to

provide a variety of social security benefits, because the existing programs cannotprovide the flexibility of benefits as required for the informal economy workers.

c. There was lack of awareness of social security thereby making distrust of

government institutions, which are common among workers in the informaleconomy, following unwillingness to pay contributions.

d. The unsuccessful coverage in the current social security system is mainly due to

the contribution evasion which has negative impact on the benefits of the coveredmembers and the social security agency to have loss opportunity to invest in

certain assets with inadequate fund (see McGillivray, 2001).

e. The building incapacity of the agency is critical not only due to the volume of

administrative tasks increases but also because those currently excluded are more

likely to pose considerable problems of registration, compliance, collection of

contributions and record keeping.

In addition to the empirical findings on low compliance with Law No 3 of 1992,

the following are challenges in the implementation of social security system as raisedby the study of Jamsostek and ILO in January 2008:

a. Limited coverage is mainly due to the lack of adequate social security which

represents one of the greatest challenges facing Indonesia despite to implementNational Social Security System. In the absence of comprehensive social security

coverage by the national system, the ultimate safety net is provided by theextended large families and communities. The absence of well functioning social

security system is also a cause of poverty, ill health and high mortality. Socialsecurity coverage is limited to the formal economy workers which represents only

a small fraction of the working population. In particular, a large majority of theinformal economy workers are left outside the scope of the current social security

system.

b. Limited scope and low level of benefits strongly correlated to each other. Civil

servants and the military-police personnel have an integrated package ofconditions of service and social benefits, subsidized by the national state budget.

However, the private sector employees avail of only four benefits. Other benefits


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such as maternity and unemployment benefits are under employers liabilitywhich does not guarantee their payment. Furthermore, the level of benefits

provided from the existing schemes is not sufficient to provide adequate

protection for the workers and their families. Old age security defined asprovident fund at retirement are paid as a lump-sum which is vulnerable topressures for speedy consumption.

c. Problems with legal entity status and governance are a real challenge in social

security reform. Poor governance is a major problem in Indonesia. Social securityorganizations are suffering from inefficiency, operational difficulties and

investment failure. These led to erosion of confidence from the members, whichin turn deteriorate compliance with the social security law. A unique situation in

Indonesia is that social security carriers are operated as profit-oriented state

owned liability companies. As a consequence, part of the contributions and

income from investment of the social security funds are paid as dividends to thegovernment which is the sole shareholder. Furthermore, the legal restriction

which does not endow inspection authority to social security carrier inhibits

effective enforcement of the social security law.

d. Lack of policy coordination still seems to exist in the implementation of national

social security system. Law No 40 of 2004 on NSSS is a major milestone in the

development of social security system in Indonesia. The law provides a

framework for the ultimate social security system. However, the follow up action

to implement the law faces significant delay. As of October 2007, the National

Social Security Council has not been established yet. There is lack of strategic

plans for the implementation of the NSSS Law.

The fragmented responsibility for the different elements of the present system-

spread between different departments and public organizations adds anotherchallenge. The division of responsibility, together with the absence of a clear strategy

or any coordinating mechanism, has resulted in a piecemeal approach to socialsecurity development and to some uncertainty and policy inconsistency. A large scale

of decentralization of administrative functions adds further compliance in the line ofoperational control between the national and regional levels.

All of the above problems and challenges in social security system have nolinkage to the employment security. This indicates that there is lack of policy

coordination among the governmental departments and public organizationsconcerned with social security and employment. The failure system in social security

is mainly due to lack of governments commitment to amend the existing lawregarding the investigation which can be carried out by the social security carrier.

There were tolerated measures in the process of drafting the law i.e. law enforcementpower was excluded from the national social security system. Another example is the

tolerated policy to legalize the outsourced work in the formal economy which should

be removed from the manpower law.Another problem which relates to the implementation of social security system in

Indonesia is the deteriorated currency of IDR due to the devaluation policies as taken


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by the government for several times to encourage export oriented firms to survive ineconomic crisis (see Table 2). Indonesia has devalued its currency more than 5 times

after 1972 following the currency reform of IDR in 1966 was converted from the rate

of IDR 1,000 in exchange of a new currency at IDR 1 which was equivalent withUSD 1. Furthermore, devaluation was taken four years later in 1970 to about IDR 100in exchange of USD 1. The devaluation effects of IDR face difficulties in the

indexation of pension benefits currently, because of low investment earnings at lessthan 10% while the funding system applied to pay as you go. The purchasing power

of civil servants and the military-police personnel tended to decrease because of thedepreciation factor at almost 10% averagely over 1974-2008. As shown in Table 2,

that the highest depreciation rates which deteriorated the purchasing power ofretirement income were 25.9% in 1974 as creeping devaluation; 29.6% in 1997 as

devaluation effect and 46.9% in 1998 as creeping devaluation and the remainder grew

at 6-10% and even the lowest rate of depreciation took place in 2008 at 1.3%. We

apply geometric means to compute the average rate of depreciation and the outcomepresented in Table 2.

Table 2. Devaluation Effects of IDR on Monthly Pension Benefit (MPB)

Year IDR USD Effects of Depreciation MPB (IDR)

19721974

19781979

1983

1984

19861987

1996

19971998

2000

2008

200400

500600

850

900

1,0001,200

2,200

3,7008,000

9,000

10,000

11

11

1

1

11

1

11

1

1

Devaluation-

Devaluation-

Devaluation

-

Devaluation-

-

Devaluation-

-

-

-25.9%

5.7%9.5%

9.1%

5.9%

5.3%9.5%

6.9%

29.6%46.9%

6.1%

1.3%

-0.14 million

0.22 million0.24 million

0.35 million

0.38 million


1.17 million


1.70 million

3.60 million

3384 1 Devaluation 9.8% 0.84 million

Monthly pension benefit (MPB) under the government pension plans (Taspen and

Asabri) over 1974-2008 changed extremely from IDR 149 thousand (USD 372) in

1974 to IDR 3,600,000 (USD 360). Monthly pension receipt in 1974 was better thanthe receipt in 2008 in term of USD. Pension plan is funded by civil servant at smallfraction at 4.75% of basic wage and incremental benefit at 2-5% is prepared annually

for retired civil servants but it is subject to the financial capacity of the nationalgovernment budget. The monthly pension benefit fixed at IDR 3.6 million by Taspen

and Asabri as exhibited in Table 2 pertains to the highest ranks of IV-E for civilservant and the retired general for the military-police. However, the monthly or

annual pension receipt shall be determined by different rank according to the lengthof coverage or length of service to the government.


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advisory body with no power on enforcement in 2008. As a result, the legal processof this drafted law to be enacted as Law regarding social security agencies probably

faces failure.

The failure in the legal process of the Drafted Law on Social Security Agencies tothe House of Representatives shall be proposed by preparing Drafted GovernmentRegulation in place of the Law on Social Security Agencies, because of the date-line

in finalizing the drafted law on 19 October 2009. Currently, the DJSN is nowpreparing the Presidential Regulation Draft for the implementation of health care with

which social health insurance specialist, health economist and legal advisor on socialsecurity absolutely needed to operate health care. The following are several main

problems as empirical evidence which needs to be identified prior to implementhealth care and pension establishment in term of implementing national social

security system based on Law No 40 of 2004:

a. Absence of labor market in case of implementing compulsory social securityprogram is disaster and big mistakes. Labor market is a facility provided by the

government for the redistribution of labor supply included to the reemployment of

the unemployed whether to be employed for remuneration or to be trained in

order to generate productive capacities (see Exhibit 1);

b. Failure in the coverage of social security is due to the employment problems that

according to Sarfati (2002) are a matter of

-long term unemployment

-Job insecurity

-low wage

-poverty-social exclusion

c. Employment-demographic problems:-low labor mobility, layoff and premature death

-increased number in ageing population

d. Public policies mismatch which happens currently was due to-privatization of state-firms causing to massive layoff,

-merger among state-firms causing to reduction of employees,-acquisition of state-firms causing to loss of states assets,

-execution of housing / land causing to homeless that means its near poor,-curb to street vendors etc causing to loss of income of the society.

e. The failure in labor market:

It makes low absorption rates and low paid jobs for the informal sector workers tohappen, thereby causing financial difficulties of employees-employers to pay

social security contributions; the impact of this failure has aggravated financial

difficulties of welfare state.


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f. The interaction between social security system and labor market:

It prepares for law enforcement in social security; empowers human resources inthe society and provides incentives to self-employed people for their survival andanticipates the increase in ageing population as well.

g. The failure of social security system and labor market:

The state shall pay the price of failure in social security, viz. unemployment,social exclusion and poverty and the society shall pay a high cost of the economy.

h. The following are poverty, vulnerability group and mismatch policies with

poverty reduction strategy:

- 19.1 million poor house-holds or 76.4 million poor population receiving freehealth care;

- 124.5 million (55%) population as vulnerability group or near population

because of their average earning at less than USD 2 per day (World Bank);

- 17.8 million people as unpaid workers accounting for 18% of activepopulation;

- Only one-third of 7.94 million active members of Jamsostek possibly ready

for transforming to pension plan;

- Only 4.6 million people as government servants which remain constant at the

same number in the next 5 years;

- Dualism economy to happen in the formal-informal economy with the

composition of 30-70%;- Composition of urban and rural workers at 30:70;- Large companies still apply minimum wages to their employees;

- Wage range at 100:1 still applies to large companies;- Outsourced work as a problem for pension coverage and benefit;

- The effect of privatization and merger on employment sector is massivelayoff;

- Failure in poverty reduction due to the lack of access of the poor population topublic and health facilities;

- Law enforcement problems due to the lack of labor inspectors and moralhazards;

- Lack of policy coordination among the Departments concerned with socialprotection;

- 10% of the population having access to control 90% national income while theremainder at 90% only controlling to 10% national income;

- Pension expenditure in Germany (2007) at EUR 240 billion for 16.9 million(Rurup, 2008). In term of IDR it was about IDR 2,880 trillion for 16.9 million.

So the average pension benefit per person per month was almost at IDR 15

million, viz. equivalent with monthly salary of executive in Indonesia


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As the problems presented above have yet to be resolved in phase as pre-condition to the implementation of national social security system in the coming

decade, the following are hypothesized solutions to a social security reform in

Indonesia which require linkage between social protection, the function of labormarket, economic security and investments.

Exhibit 1 depicts linkages between the role of social security in providing incomecompensation and the function of labor market to spread job. Social security as

defined to provide income compensation for the people throughout the participation

in health care, pension and cash transfers with the hope to prevent from poverty. Acountry with no labor market as occurred at developing countries like Indonesia ischaracterized by high unemployment, high inflation, massive layoff and poverty line

added to deteriorated currency. Economic insecurity is the situation in which theeconomic progress as achieved in the past faces high unemployment, high inflation

and layoff which require the function of labor market to spread job and to stoppoverty addition to middle income community. Economic security is characterized by

low unemployment, low interest and stable currency that it is the truth moment forreinvestment and expansion. Definitely, social protection is a system in which the

involvement of labor market in social security is to secure employment both for the

Social protection Social security

Health care,pension plan,

cash transfers,

rovident fund

Labor market

Labor supply,job distribution

and trainingempowerment

Low

unemployment,low inflation,

low interest and

stable currenc

Economic security

Economic insecurity

No labor market,

and lack of good

governance

Highunemployment,

inflation, layoffand poverty

Exhibit 1. Linkage between Social Protection, Economic Security

Labor Market

Incomecompensation

and support


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unemployed to start working for regular income and for layoff employees to continueto work for their social security.

Exhibit 2 shows the sequence of social security which identifies the growingpopulation and its impact on the number of active population which requires direct

investments to create more jobs in the formal economy. Failure in total investments isunemployment and the informal economy or underground economy contributing to

vulnerability group. Employed people in formal economy have annually or monthlyregular earnings which need to be maintained throughout the mechanism of social

security. Finally, the growing population with income-based generation will create aquality of life with health care and pension plan. In this regards, social security

development depends upon the active participation of working society paying

contributions to social security. Accumulated contributions of the society required to

be invested in fixed income securities as safe instruments in the long run in order toearn moderate rate of return which then feeds back to social security. In short, there

are independent variables such as employee-contributions, investment instruments for

example share and bonds and government budget as social security subsidy which

contribute to changes in social security progress.

Po ulation rowin

Active population

Paid workers

Social securit

Investments

Em lo ment

Income protection

Exhibit 2. Linkage between Social Protection, Investments and Employment

1

2

3

4

5

6

79

8 10

1112


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4. Free Health Care for the Poor Population

The number of poor people in Indonesia over 2005-2007 were 76.4 million or19.1 million poor households. The poverty problems correlated strongly withemployment problem as a result of the 1998 economic crisis which continued until

2000 followed by the changes in the world fuel oil prices. After the year 2000, thenumber of poor people increased, because of the domestic investment and business

sluggish thereby causing layoff to employees working in export-oriented firms. Themassive layoff contributed significantly to the increasing number of near poor at more

than 54 million people as previously worked with daily pay at less than USD 2.Accordingly, free health care (Jamkesmas) previously called as health insurance

scheme for the poor (askeskin) is the government policy to reduce poverty in phase.

Free health care for the poor and near poor community (Jamkesmas) is defined

essentially as part of social assistance programs designed specifically to providehealth services for the poor and near poor community. Jamkesmas is public-policy as

pursued by the government to reduce poverty in phase as part of the achievement

toward millennium development goal (MDG). In this MDG, the provision of free

health care for the poor has been approved by the member countries in Asia-PacificBasin as a real effort at minimizing loss of income and even causing loss of life to the

poor people which have no access to health services. For any employees who are not

participated in compulsory social health insurance then become poor after recovery

despite he is slightly sick.

The legal provision for Jamkesmas refers to The 1945 Constitutions Article 34;

Article 25 of The UN Universal Declaration on Human Rights dated 10 December

1948 and Articles 14 (1)-(2) and Articles 17 (4), (5) and Article 21 (3) Law No 40 of2004 on National Social Security System.

Under Article 34 (2), the National State develops social security system for the

whole of Indonesian and empowers the vulnerable groups to be strong andindependent community. Article 34 (3) directs the government to provide health

facilities such as hospital, clinics and pharmacies as required to operate health care.In Article 25 every person is entitled to health services and the national state shall

create the welfare of the people and their families, included to provide the rights offood, cloth, housing and health care as well as social services and the benefits of

unemployment, sickness for disabled, widow and the elderly or those undergoingother social economic risks causing to the reduction or loss of income.

Under Article 14 (1) the National Government shall enroll in phase the number ofpoor people to receive the contributory assistance of the government to social security

administrative agency and Article 14 (2) guarantees the poor and near poor peoples tohave contributory assistance. Article 17 (4) enforces the government to contribute to

the social security administrative agency on behalf of the poor and near poorpopulation including their families to have access to health services. Article 17 (5)

considers the need for the provision of free health care for the poor and near poor

population as the top priority.Social security system under Article 34 (2) refers to social assistance financed by

the national state budget (APBN) and social insurance financed by the employee and


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employer contributions. Under Article 3, it is stated that the national government shallprepare a health service facility for poor and near poor peoples in order for them to

have access to health care. Under Article 25 of the UN Universal Declaration of

Human Rights it is stated clearly that every person irrespective of poor, near poor ornot is entitled to social security included to health care.

Jamkesmas is a pilot project for the intent of poverty reduction in health care in

the short-run implemented successfully since 2006. There was reason to implementJamkesmas in order to support the implementation of Law No 40 of 2004 on national

social security system after 19 October 2009. Despite not to be implemented,however Articles 14 and 17 of Law No 40 of 2004 have mandated the government to

pay the contributions for the poor including near poor in order to have access tohealth services. Another reason to operate Jamkesmas as a supplement to social

assistance as one of social welfare pillars under Law No 11 of 2009.

The Health Department of the Republic of Indonesia administers directly the

operation of Jamkesmas to meet demand of the poor population for health serviceswhile considering the large number of poor and near population amounting to 76.4

million by 2007. At the time of implementing Law No 40 of 2004 is due, Jamkesmas

is as part of national social security programs as regulated by Articles 19, 20 and 21

of Law No 40 of 2004 on National Social Security Law. Jamkesmas is notcontradictory with Article 20 (1) of Law No 40 of 2004, viz. covered members under

National Social Security System are any persons paying contributions or those having

contributory assistance from the government. Jamkesmas began its operations prior to

the implementation of Articles 19-20 and 21 of Law No 40 of 2004.

The following were the achievements in the universal coverage of health care by

the status of employees or persons including Indonesias social health insurance

(Askes) for civil servants, social insurance for the military-police personnel (Asabri)and employee social security health care for the private sector employees (Jamsostek)including universal coverage of Jamkesmas for the poor persons. The employee

coverage in health care is defined as identified-risk while the universal coverage isnot. There was slightly progress in the budget capacity of the government to promote

Jamkesmas for about 54.1 million in 2006 to 76.4 million poor people in 2007.Table 3 presents the achievements in the extension of universal coverage in health

care as the first priority and it is a mandatory program for the government whichrefers to Article 17 (4) Law No 40 of 2004 for the intent of poverty reduction. The

universal coverage in health care tends to increase despite the poor population (to beexpected) to decrease, but the number of near poor population in 5-10 years ahead

will increase as the impact of the 2007 global financial crisis.Indonesian population in 2007 were 226 million while the population having

access to health care in during pre-implementation of national social security systemhas been achieved by 99.8 million or 43.39% (see Table). The rest at 126.2 million

people were uncovered under compulsory health care. However, there was only asmall number of people at about 6.3 million which participated in private health

insurance programs, 1 million people participated in a micro-insurance scheme

spreading in about 60 regions and more than 118 million people had no access tohealth care but their preference to have an alternative-medicine with cheaper price.


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Table 3. Achievements in Health Care Coverage in 2007

No. Health Care Coverage by Status ofEmployees and Poor Population

Numberof persons

(million)

Health careexpenditure

(IDR

Million)

Healthcare per

capita

(Rp)

1

2

3

4.

Health care for civil servants:

4.0 civil servants and 1.5 retired and their

dependants at 9.7 million

Health care for the military and police:

1.0 million military-police personnel including

civil servants working in the DefenseDepartment and 2.0 million dependants

Health care for the private sector:1.6 of 7.9 million active employees

and 3.6 million dependants*

Jamkesmas with nominal contributionat IDR 5000 per person:

19.1 million poor households and or

76.4 million poor people

15.2

3.0

5.2

76.4

1,905,427

na

480,572

3,331,277

125,357

na

92,418

43,603

T o t a l 99.8 5,717,276 59,063

Source: GTZ SP Bappenas (2008), World Bank and Jamsostek (2008)*

The coverage of social health insurance (Askes) for civil servants and theirdependants was 15.2 million consisting of active civil servants, retired civil servantsand retired military personnel and their dependants resulted in total health care

expenditure at IDR 1.9 trillion or the health care expenditure per capital was fixed atIDR 125 thousand. The coverage of compulsory health care for the private sector

workers as administered by Jamsostek based on opt-out membership totaled 5.2million consisting of 1.6 million workers and 3.6 million dependants spent at IDR

0.48 trillion or the expenditure per head indicated IDR 92 thousand. The universalcoverage in health care for the poor population at 76.4 million recorded highest

spending at IDR 3.3 trillion or the health care expenditure per capital achieved byIDR 43.6 thousand that it was the lowest expenditure per capita compared to Askes

and Jamsostek (see Table).

5. Empirical Findings on Pension Establishment in Indonesia

The first pension plans in Indonesia were respectively given to the Members of

Indonesian National Military (INM) and Indonesian National Police (INP) in 1967

based on Law No 6 of 1966 and to Civil Servants in 1970 based on Law No 11 of

1969 as well (Purwoko, 2008). How difficult is the government to provide the

pension benefit for civil servants since 1945, because of the first pension

establishment given effectively to civil servants after 21 years of IndonesiasIndependence which attached with the shortage of budget. Pension plan is the only


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19

social security branch required by the working society because of the real portabilityprinciple which continues to the survivors after the death of the main beneficiary. Due

to the continuation of the survivors pension plan, the financing of pension plan

which derived by the contribution of employer and employee will not be sufficient.The financing of pension plans both for civil servants and military-police memberswas considered indirectly as tax financed pension plan, because of total annual

benefits paid to the retiree 91% which account to 91% derived from state budget andthe rest at 9% derived from the contribution at 4.75% from Indonesian military.

The number of the state-servants totaling about 4.8 million which consist of 4million civil-servants and 0.8 million military-polices members including those

working for the Defense Department in 2008 will be kept constant at not more than 5million. The new recruitment for state-servants including the addition of new

personnel to the military-police institutions shall be made proportionately in place of

those entering the retirement age. The financing of pension plans for state-servants

which applies to tax-based plan continues for 20 years ahead, or it can be applied tothis plan all the time, provided that the number of state servants shall be reduced

proportionately as part of good governance application. Considering how difficulty is

in the implementation of public pension plan, so the basic problem for implementing

compulsory pension plan in the context of NSSS will be faced with the shortage ofstate budget to cover the deficit payment of benefit, lack of employment security and

low-wage of employee nominally at USD 2 per day (World Bank, 2002). Another

difficulty in pension establishment in the context of national social security law as

argued by Purwoko (2008a) is the lack of employment security despite to work for

the informal economy. The estimated number of layoff workers over 2009-2010 due

to the globally financial crisis will be more than 2 million workers using the

assumption of 650 thousand employees currently working for the export orientedfirms underwent layoff (Ministry of Manpower, 2008). Such a condition hassignificantly decreased the coverage of Jamsosteks members in particular for those

making withdrawal of their provident fund account. Accordingly, the pensionimplementation in the context of NSSS shall be rescheduled at 20 years and

Jamsosteks provident fund still applies to support old age security program. Thefollowing is an overview on Jamsostek and Taspen.

5.1 Jamsostek and Taspen are definitely as the national carriers for NSSS in

conformity with Article 5 of NSSS Law. It is the addition of compulsory pensionplan to the existing programs of Jamsostek consisting of work injury, death,

health care and provident fund and the operation of Jamsostek does not seem tohave basic problem. Taspens programs in particular for civil servants pension

plan based on Law No 11 of 1969 has not yet to be managed fully by Taspen.This was the fact since 1988 until now Taspen is the only paying agent of state

budgets pension post to be forwarded to the payment of pension benefits whichfalls due to retired civil servants. The difference prior to 1988 was that the retired

civil servants have the receipt of the periodical payment of their pensions through

the state treasury office.


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5.2 Taspens programs consist of pension plan based on Law No 11 of 1969 with thecontribution at 4.75% of basic wage plus family allowance and endowment

insurance based on Government Regulation No 25 of 1981 with contribution at

3.25% of basic wage plus family allowance. In fact, the contribution of civilservants at 4.75% to the plan has contributed to only 9% of periodical pensionbenefit received by retired civil servants whilst 91% of periodical pension benefit

derived by the state budget as prepared annually by the government. Forexample, the monthly pension benefit received by the retired civil servant at IDR

1,800,000 consisting of IDR 162,000 (9%) contributed by 4.75% and the rest atIDR 1,638,000 (91%) paid by the state budget.

5.3 By considering the composition of the payment of pension benefit at 91% of the

state budget as exposed above, so the pension plan for civil servants have

theoretically not been classified as pay-as-you-go pension plan but it is TAX

FINANCE PENSION PLAN or FISCAL BASED PENSION PLAN. So Taspenspension plan for civil servant is not as pay-as you-go pension plan. Definitely,

pay-as-you-go pension plan means that the employer and employee shall

contribute to the plan and the accumulated contributions both from the employer

and employee shall be used directly by the social security carrier for the paymentof pension benefit no matter with regard to the current sufficiency of fund or not.

Pay-as-you-go pension plan, which is made compulsory by social security lay for

all, shall be applied equally both to the private sector employees and the state-

servants. Under pay-as-you-go pension plan, it is not necessary and or not

compulsory for the carrier to form an individual account as commonly happened

in the provident fund account. Endowment insurance plan as provided by Taspen

is death insurance including funeral benefits for the civil servants and theirfamilies plus the payment of cash value particular for those servants havingsurvived until retirement. The beneficiaries of the plan include wife or husband

and three children. Accordingly, endowment insurance plan of Taspen is not thesame for Jamsosteks death insurance plan which provides a flat benefit and with

no cash value benefit. Because of Jamsosteks death insurance which does notlink to endowment insurance except for pure death benefit, so the endowment

insurance plan of Taspen cannot be transformed to Jamsosteks death insuranceplan providing only a cash flat benefit to the death of the breadwinner.

5.4 From the evaluation of the provision of pension plan for civil servants by Taspen

and considering the problem of the private pension plan as sponsored by theemployers as big companies for their own employees generally as State-Owned

Enterprises and or any individual funds managed by Financial Institution PensionFund as regulated by Law No 11 of 1992 were faced with financing and

investment problems due to the systemic risks such as depreciation of rupiah andinflation. As regards, National Council for Social Security System (NCSSS) shall

have to be conservative in implementing a compulsory pension plan for all

employees despite the mandatory plan by Law No 40 of 2004 on NSSS. Indonesiadoes not stand alone in implementing a compulsory pension plan and how

difficulty is to be faced. Almost all developing countries have not yet prepared for


21/32


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22

problem of past service liability (PSL) due to the declining value of localcurrency. Again, the implementation of pension plan by transforming Jamsosteks

provident fund to pension plan under NSSS will be faced with the insufficiency of

the current individual account. An average account of provident fund for themembers having 5-year coverage was still less than IDR 10 million (Jamsostek,2008). For any members having 20-year coverage in Jamsostek have the roughly

account at between IDR 40-75 million which cannot be sufficient to finance theirold age consumption. As regards, there will be some objection of the current

members of Jamsostek to join pension plan under NSSS because of high-cost oldage security which combined between provident fund and pension plan. Another

difficulty in extending the new members coverage for pension plan will be relatedto the increasing number of open unemployment, Accordingly, there is reason for

certain people in particular Jamsostek members to have preference to provident

fund than pension plan. From now, Jamsosteks provident fund is still relevant as

old age security component and still fits with the preference of private sectoremployees despite the implementation of that fund does not with the solidarity

principle. However, the implementation of Jamsosteks provident fund has no

impact on PSL problem.

5.7 The following are simple-illustration and the problems identification which relate

to PSL in the case of Indonesias public pension plan:

a. Proposed pension plan for NSSS mostly defined benefit, as discussed above,

will has the financial consequences of the government to prepare the

contingency fund to anticipate any deficit due to the problem of PSL. There

are five (5) causal factors contributing to the problem of PSL: (a) inflationfactor continued by increasing nominal wage, (b) foreign exchange rate factorfollowed by changing the wage-structure, (c) the duration of paying

contribution at less than 20 years to the plan has caused unfunded plan tohappen, for example, in case of recruiting civil-servant to be employed

permanently in the state owned companies, (d) the duration of receivingbenefits varies at between 20-25 years after retirement age and (e)

administrative problem as related to wage increment of staff getting gradepromotion is commonly in three-month retroactive. So the additional

contribution to the plan as result of wage increment shall be recalculated inthree-month retroactive. Inflation and foreign exchange rate risks which

happened in Indonesia for years were definitely as systemic risk and declinedsignificantly the value of money between 10-20% p.a. For those having retired

at age 55, the duration to receive benefit will be longer at between 20-30 yearscausing to deficit payment by the social security carrier, because of the

insufficient contributions. For those having retired at 65, the duration to havebenefit will be shorter at between 10-15 years and perhaps the contributions

are sufficient to pay the benefit.

b. Due to the five-factor above, there was statement of the government in this

case: Ministry of State-Owned-Enterprises and Ministry of State-Apparatus


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23

Administration Reform to transform from defined benefit to definedcontribution that it could be understandable. Nevertheless, transformation of

defined benefit to defined contribution in practice was faced with legal aspect.

In the beginning of 1990, many more state-owned enterprises had sponsoredthe establishment of defined benefit pension plan for their own employees butthe sponsorship of the plan is currently faced with serious problem of PSL.

Transformation of DB to DC is not permitted under Law No 11 of 1992 onprivate pension plan in particular for employees currently participated in the

plan, except for new nominated staff. PSL problem is theoretically due to theuse of final salary and service for the calculation of annual pension benefit as

regulated by Law No. 11 of 1992.

c. For further information on PSL problem, the following are the assumptions

used for the simple calculation on PSL: net investment return; time (years) of

paying contribution and duration of receiving benefits consisting of retireesand their heirs (wife and children). The general formula used for the

computation on annual pension benefit is as follows:

PB = 2% x TC x WFA

PB = Annual pension benefit

1-2.5% = Constant pension factor

TC = Time of paying contribution to the plan

WFA = Basic wage plus family allowance

Example 1a Constantly annual wage : IDR 12 millionb Contribution to the plan : 10%

c Net investment earning p.a : 5%d Constant pension factor : 2%

e Duration of paying contribution : 30 yearsf Duration of receiving benefit : 25 years

The computation of benefits as follows:

- Annual pension benefit : IDR 7.2 million- Total pension benefit : IDR 180.0 million

- Annual contribution : IDR 1.2 million- Accumulated contributions : IDR 36.0 million

- Pension account : IDR 156.0 million- Shortage of payments : IDR 24.0 million

(Sponsors obligation)

Pension account < total pension benefits, so that means deficit payment


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24

Example 2a Wage changed at year 21 : IDR 18 million

b to f does not change

The computation of benefit as follows:

- Annual pension benefit : IDR 10.8 million- Total pension benefit : IDR 270.0 million

- Accumulated contributions : IDR 42.0 million- Pension account : IDR 182.0 million

- Shortage of payment : IDR 88.0 million

- Lack of pay due to wage : IDR 24.0 million

- Obligation of PSL : IDR 112.0 million

So the government / sponsor shall pay IDR 112.0 million for PSL

Example 3: Modified formula of average wage

- Annual pension benefit : IDR 8.4 million

- Total pension benefit : IDR 210.0 million

- Accumulated contributions : IDR 42.0 million- Pension account : IDR 182.0 million

- Lack of payment : IDR 28.0 million

- Lack of pay due to wage : IDR 24.0 million

- Obligation of PSL : IDR 52.0 million

d. Pension calculation illustration as exhibited in example 1 indicates that social

security carrier (SSC) has the shortage of payment at IDR 24 million per

person with constant wage at IDR 12 million. In practice, wage is subject to

change during 20 years of service to the employer, except for those having

USD income as hard currency. In example 2, it is illustrated that wage is

subject to change at the service of 21 years to the employer so that pension

benefit changed from IDR 7.2 million to IDR 10.8 million p.a. In case of theretired and the heirs can survive until 25 years, so the obligation of SSC to pay

the pension benefit shall be made for 25 years at the amount of IDR 270

million then causing to have deficit at IDR 88 million because of the account

available at IDR 182 million which stated to be lower than IDR 270 million.In example 1 there is shortage of pension payment at IDR 24 million tohappen but with no PSL payable. In example 2 there is PSL payable to happen

because of wage-increase in the employment time of 21-year. PSL payableshall be calculated by summation of the deficit payment at IDR 88 million

added to the shortage of payment at IDR 24 million. So PSL payable to thefund totaled IDR 112 million and the following PSL curve presented.


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25

Exhibit 4. Past Service Liability Curve

PSL curve refers to the general formula of pension benefit as calculated using

constant factor x time of paying contribution x final annual wage which shall

be made retroactive in the past. It should be noted, that final wage is different

from the beginning wage and perhaps wage increment is due to inflation

factor. Under PSL curve, it is illustrated that A-B-C is assumed to beconstantly annual wage of IDR 12 million which means that the contributionat 10% to the plan must be the same amount until 30 years of paying

contribution. Afterwards, wage increased in 21-year of length of service at B,while assuming constant until the rest of 10 years so that time of paying the

contribution is 30 years. With the increase of wage from A-B to B-D, theimpact of PSL payable at the area A-B-D-E-F on pension account which

needs to be met by the sponsor of the plan or by the government.

e. Example 3 using an average wage of IDR 14 million p.a. has the calculationof annual pension benefit at IDR 8.4 million and total pension benefits until

25 years will be IDR 210 million. Pension account as available at IDR 182million means that there is shortage of payment at IDR 28 million and PSL

payable also decreases from IDR 112 million to IDR 52 million. Thecalculation of pension benefit using an average wage will be disadvantage to

the employee, for example the benefit received decreases from IDR 10.8million (see example 2) to IDR 8.4 million. The use of an average-wage for

pension benefits shall be applied commonly to minimal pension. However, the

provision of minimal pension or basic pension does not fit for Indonesia,except for European countries in the Western part because of their hard

currencies like pension benefit in USD or in EUR.

0 10 20 30 Years

A B

E DF

Past Service Liability

Pensionaccount

C


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Highlights of Pension Plan

The size of Jamsosteks old age security (JOAS) shall be measured in term of thegross domestic products (GDP) at current price and base money (Mo), viz. coins andnotes available in the society. Base-money is the only variable which can contribute to

the additional pension assets. As far as the base money is not transformed to pensioncontribution it is not as pension component. Definitely, JOAS may be transformed to

pension plan to meet the need for retirement income in the context of national socialsecurity system.

The following are the highlights of JOAS, civil servants pension plan (CSPP) andprivate pension schemes (PPS) including the employers pension plan and financial

institutions pension plan which need to be measured in terms of GDP and Mo.

a. Pension assets shall include JOAS, CSPP and PPS (see Table 4). JOAS is compulsorypension scheme in the context of social security system with multiple open-coverage

by Jamsostek Law and NSSS Law. CSPP is pension social security system with

single closed coverage and PPS is voluntary pension plan administered outside the

context of social security system.

b. Data used in this brief study include GDP at current price and base money whilst

pension assets over 2003-2007 derived from the Annual Report of Bank Indonesia,

Annual Report of Jamsostek, Annual Report of Taspen and Information on Stock

Exchange Commission and Financial-Institution regarding highlights of employers

pension plan and financial institutions pension plan. The use of GDP and Mo is to

minimize the event of auto-correlation or duplicated-data. Banking time deposits,banking credit and market capitalization of stocks must not be used to measure thesize of pension assets, because of most pension assets to be placed to time deposits

and part of those to be invested in stocks.

c. The growth of pension assets showed an increase from IDR 81.28 trillion by 2003 toIDR 172.78 trillion in 2007 and or pension assets grew by an average of 20.86% per

annum over 2003-2007 (see Table 4). The composition of pension assets over thesame period indicated that private pension schemes were the biggest assets at 57% in

2003 and 53% in 2007 which contributed to total assets as compared with JOASwhich contributed at 29% in 2003 and 33% in 2007. The rest was the same

contribution of CSPP at only 14% to total assets both in 2003 and in 2007.

Table 4. Pension Assets in Indonesia (IDR Trillion)

Year JOAS CSPP Private Plans T o t a l

2003

2004

2005

2006

2007

23.28

28.47

33.77

46.38

56.88

11.36

14.88

16.35

19.94

24.33

46.64

57.83

63.98

77.53

91.57

81.28

101.18

114.10

143.85

172.78

Source: Jamsostek, Taspen, Bapepam LK and the Author


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27

d. The composition of pension assets to GDP at current price over 2003-2007 was still

less than 10% and to base money was less than 50%. Despite the composition of

pension assets to GDP showed an increase of 3.96% in 2003 to 5.54% in 2007 butthis was considered a small contribution to GDP and base money, because pensionassets mean as accumulated contributions plus interests credited to the account while

GDP is not. Additionally, base money indicated an increase of 36.16% in 2003 to43,47% in 2007 (see Table 5).

Table 5 GDP, Base Money and Pension Assets (IDR Trillion)

Year

(1)

GDP atCurrent Price

(2)

Base Money(Mo)

(3)

PensionAssets

(4)

Pension Assetsto GDP

(5)

Pension Assetsto Mo

(6)

2003

20042005

20062007

2045

23032533

28373121

224

254282

361398

81

101114

144173

3.96%

4.38%4.50%

5.07%5.54%

36.16%

39.76%40.42%

39.88%43.47%

Source: columns 2-3 by Bank Indonesia and columns 5-6 by the author

e. Specifically the measurement of JOAS in terms of GDP and of base money was

indicated Jamsosteks performance in view of collecting contribution to the working

society throughout their respective employers. This is because JOAS as contributory

pension plan is designed to collect pension contributions and to invest thecontributions in a variety of productive assets. It is totally different in the case of

CSPP based on the transfer of government budget at 4.75% to be handed over to

Taspen. The proportion of JOAS in term of GDP was very small at 2% and in term of

base money it was less than 20% (see Table 6). This means that total base money at

IDR 398 trillion in 2007 shall be collected at between 20-30% throughout the

extension of the informal sector coverage, because of the circulation of base money

mostly available in the informal economy. Urban population tended to hold M1 and

M2 and the withdrawal of M1 for their consumption applied to ATM and base moneyas available in the informal economy has never been parked in the saving account.

Table 6 GDP, Base Money and Jamsosteks Old Age Security (IDR Trillion)Year

(1)

GDP atCurrent Price

(2)

Base Money(Mo)

(3)

JOAS

(4)

JOAS to GDP

(5)

JOAS to Mo

(6)

2003

20042005

20062007

2045

23032533

28373121

224

254282

361398

23

2834

4657

1.14%

1.24%1.33%

1.63%1.82%

10.26%

11.02%12.06%

12.74%14.32%

Source: columns 2-3 by Bank Indonesia and columns 5-6 by the author


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28

The outcome of this brief study concluded that the composition of pension assets

in particular JOAS was very small at less than 2% in terms of GDP and less than

15% in term of base-money, so the employment security coincided with thewages improvement in stage need to be scheduled. This measurement of pensionassets in term of GDP is essential for all stake-holders to know the size of the

fund in the real term. Due to the small composition of JOAS, it is necessary toredefine the early withdrawal of the account after 10 years membership. Because

of base money available in the informal economy, the extension of coverageacross the informal sector workers is essential to update Jamsosteks old age

security in the coming decade.

6. Discussion on the Need for Social Protection

Social protection as emerged from the current study both by GTZ-Social

Protection in collaboration with National Development Planning Agency (Bappenas-

2009) and Michel Weiner ADB (2008) was definitely social security system with the

addition of severance pay and or social security system with the addition of free-health care to the poor. In fact, social protection must be different from social

security. The addition of severance pay to social protection was the influence on

Article 156 of Law No 13 of 2003 concerning Manpower. Theoretically, social

protection is definitely the implementation on national social security system (NSSS),

social welfare and the operation of labor market and or the promotion of stimulus

program for the empowerment of vulnerability groups. The NSSS as based on Law

No 40 of 2004 is as contributory plan by the members and the social welfare asregulated by Law No 11 of 2009 is tax-financed plan. We will not look after the poorbut take care of the elderly disabled poor peoples and do empowering for vulnerable

peoples as well.Social protection in practice is a system directed to create more jobs for the

unemployed peoples, to promote rights at employees work and to extend socialsecurity coverage for all. Job-creation is the first foundation for social security

coverage following the second foundation for fair wages of employee in order to haveregular income sufficient for consumption and paying contribution to social security.

The aim of the working society to participate in insurance system is to prevent frompoverty. In addition to that, social assistance is the provision of cash support

including free health care for the poor to the extent to which means-test requirementfor the poor is applied. Means test was prepared by Department of Social Affairs and

used by local governments to identify the real number of the poor. National StatisticalAgency (BPS) is responsible to issue identification card for the poor to be eligible for

unconditional cash transfer (BLT). All the poor are also eligible to free health careand Askes as the only carrier of free-health care for the poor issued health card. As a

matter of fact, many more people pretended to be poor in order to have the eligibility

of free health care. However, the solution to this problem is to empower near poorand the operation of labor market for the unemployed to be reemployed. Social

security with no labor market means that like infantry troop of the army with no


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combat support of the cavalry. Social security may be at risk with no labor market.The inclusion of severance pay as part of social protection components shall be

eliminated, because it is not the domain of social security. Unemployment insurance

as a substitute to severance pay is generally required & accepted by the social securityor GRASS (see ILO Convention No 102 of 1952).

Severance pay as regulated by Manpower Law No 13 of 2003 is essentially the

employers liability as emolument components such as salary, overwork-fee, annualleave fee, official per diem and other fringe-benefits. Accordingly, emolument

components included to severance pay cannot be ensured into social insurancesystem. Regardless of whether the employer is financially capable to provide

severance pay for his or her employees being stopped from the current works or not,it is another case. The following are different problems of pension provisions under

social security system between developed countries and developing countries in

particular Indonesias pension plan for the state servants.

a. Social security reforms in developed countries were attached with the deficit

payment of pension benefits due to the ageing problem. The financing method of

pension plan as derived from the contribution of members to be used for the

payment of the current benefits is pay-as-you-go system. Under pay as you gosystem, the young generation as the current members of social security paying the

contribution will have lack of funds when they will retire. The objective of pay-

as-you-go financing system is to meet solidarity principles of social security. Due

to the ageing problem, pay as you go application might be at risk for social

security carrier including the government. Ageing problem was mainly due to the

demographic structure which was not in a pyramid form. The solution to the

ageing problem in Germany is the amendment of pension age requirement from65 to 67 years that will be effective in this year.

b. Social security problems in developing countries in particular Indonesia wereassociated with many factors, among-others, (a) poverty-problem, (b) open

unemployment, (c) massive layoff, (d) a few social security branches (no pensionand unemployment insurance) and (e) problem of legal entity of the current social

security carriers. Other systemic risk and technical problems influenced on thesocial security benefits in the long run in particular pension plan for civil servants

were definitely (a) declining value of rupiah, (b) high inflation, (c) foreignexchange rate risk due to the impact on global demand for USD, (d) time of

paying contributions to the plan at less than 20 years and (e) low wage problem /low pension contribution at 4.75%. Accordingly, developing countries in the case

of Indonesia are not ready to sponsor or administer compulsory pension plan forthe private sector employees despite it is mandated by Law No 40 Year 2004,

except for the pension plans of state servants (civil servants and Indonesiannational military & police personnel) as guaranteed by the National State Budget.

c. As regards, social security as a public scheme based on Social Security Lawaims at coping with the loss of income of the working society and or giving

compensation generally in cash to the working society having disaster with regard


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to (a) work-injury / occupational disease, (b) sickness-maternity, (c) premature-death, (d) stoppage of works and (e) old-age. Social security is distinguishable

into social assistance having the function as income-support to the poor including

the empowerment for the vulnerable people whilst the social insurance system hasthe function as income maintenance for the working society. The difference is thatsocial assistance is financed by the state budget and social insurance shall be paid

by the members contributions (employer and employee) to prevent from poverty.Roughly formulation as adopted from Australia in 2002 indicated that 1/8 of tax

revenue was allocated to reduce poverty included to empower the Aboriginecommunity.

d. Proposed social protection as the solution to the current problem of social security

is commonly acceptable but it deems necessary for Indonesia to prepare labor-

market for the re-employment of the unemployed (the first option) and or to

prepare the provision of stimuli program for the empowerment of the unemployedin order for them to work independently and not to be active employee (the

second option). The establishment of labor-market seems to find difficulties in the

current situation but it is necessary for us to plan to have labor market in the

future.

7. Conclusion and Recommendation

This study proposes the implementation of social protection system with the

establishment of labor market which functions to recruit the unemployed people to

work and to reemploy layoff of workers. It is necessary for the government to pursueemployment policy in coordination with other government departments and non-departmental institutions preparing job-creation for the unemployed included to

empower the vulnerability groups to be independent self-employed. The nationaldevelopment shall focus on the characteristics of Indonesias archipelago in order to

spread different resources for different relocation of working people. The nationalgovernment and local governments shall provide tax-heaven for foreign and domestic

direct investors and or other incentives required by the investors as well as to createconducive situation for new investors to combat the high cost economy. The

government and legislative body should prepare legislation draft limiting foreign-workers to work in certain economic sectors: for instance the agricultural, plantation,

transportation, higher learning education and tourism sectors that foreign workers arestill banned to work in the abovementioned sectors. The government should have

bargaining position with foreign investors in term of relocation of local staff tocertain job-titles: for instance the executive posts which can be met by local people

proportionately.The implementation of poverty reduction strategy in the long run is to foster

migrant workers to be trained as skilled workers such as certified welder, nurse, bus

or container drivers and motor-vehicle mechanic which should be capable tocommunicate in foreign languages. However, migrant workers as house-maids which

currently face communication and job-problems with their employers must be


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stopped in stage despite contributing to the addition of foreign exchange reserves toIndonesia. Poverty reduction strategy shall concentrate on the empowerment of

vulnerability and the provision of micro-financing scheme for the unemployed which

cannot be reemployed due to age factor closing to 50. Other social protectioncomponents for poor-population: such as unconditional cash transfer (BLT),subsidized rice (raskin), conditional cash transfer (PKH) and school operational cash

transfer (BOS) required to be continued using means-test application to minimizemoral-hazards. Such components of the abovementioned plans have been enacted by

the Law No 11 of 2009 regarding social welfare.It should be noted, that labor market establishment for social protection rebuilding

is absolutely required to create the employment security and to safeguard theemployee social security system. Social protection with no labor market is social

disaster, despite the provision of free health care for the poor and the empowerment

of vulnerability following unconditional / conditional cash transfers to the poor to be

met. The absence of labor market indicates failure system in economic well-beingbecause of long term unemployment which causes the economic insecurity to happen

in the millennium development goals. As regards, let us adopt the model of social

protection as recommended by ILO to decent-work for all, fair-pay for all and

social-security-coverage for all for the achievement of long term economic security in2050.

With the enactments of Law No 40 of 2004 on National Social Security System

and Law No 11 of 2009 on Social Welfare, social protection system may be

established to reduce poverty throughout (a) job-creation for new job seekers and the

labor market to reemploy the unemployed to have regular earnings for social security

tax; (b) the empowerment of vulnerability should be financed partly by the national

government budget and (c) the provision of health care following the unconditionalcash transfer for the poor shall be followed up by means-test application. Theimplementation of national social security system with no labor market dates back to

the lessons learnt from the operation of the employee social security with a smallfraction of coverage due to the absence of labor market. Consequently, the pension

establishment shall be proposed for the transformation of Jamsoteks old age securityto pension plan.

References

_____ The 1945 National Constitution of the Republic of Indonesia (UUD 1945)_____ Law No 8 of 1981 concerning the investigation authority

_____ Law No 3 of 1992 concerning the employee social security (Jamsostek)_____ Law No 22 of 1999 concerning the regional autonomy

_____ Law No 13 of 2003 concerning the manpower and employment_____ Law No 40 of 2004 concerning the national social security system (SJSN)

_____ ILO Convention No 102 of 1952 regarding the provision of basic social security

_____ The 1998 Constitution of International Social Security Association (ISSA)

_____ The 2008 descriptive statistics of Jamsostek


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_____ (2008), Options for social protection reform in Indonesia, GTZ-Indonesia in

cooperation with National Development Planning Agency (Bappenas),

_____ (2008), Social security in Indonesia: advancing the development agenda,Jamsostek-ILO, Jakarta

Angelini, John and Kenichi Hirose, (2004), Extension of social security coverage for the

informal economy in Indonesia: surveys in the urban and rural informaleconomy, working paper 11, ILO-Jakarta, December 2004;

McGillivray, Warren, (2001), Contribution evasion: implications for social security

pension schemes, International social security review, Geneva Volume 54 /

2001.

Purwoko, Bambang, (2008), Managing pension account at risk in Indonesia, Scientific

Jo

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