Transcript Pension Reform in Indonesia - Social Protection Platform

Pension Reform in Indonesia
Mitchell Wiener
15 December 2011
ILO Expert Meeting Social Security and Social Protection Floor
Agenda
 SJSN law and retirement income
 BPJS law and retirement income
 Program design and implementation challenges
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SJSN Law
 Creates multi-pillar pension system covering all Indonesians
 Two retirement programs
 Pension program (defined benefit)
 Old-age savings program (defined contribution)
 Financed with employer and worker contributions
 Percent of pay for formal sector
 Flat amount for informal and the poor
 Government pays contributions for the poor
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BPJS Law
 Governance structure differs from current social insurance
 Was for-profit corporation reporting to MoSOE
 Now not-for-profit public legal entity reporting to President
 BJPS manages social security funds
 SSF assets separate from assets of BPJS
 SSF assets not assets of the BPJS
 State custodian bank holds SIF assets
 BPJS collects contributions and has enforcement authority
 Government provides BPJS initial capital
 BPJS charges fees to SIF for its services
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BPJS Law
 PT Jamsostek transformed into BPJS Employment
 BPJS Employment manages pension programs (plus worker
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accident and death benefit programs)
Transformation by January 1, 2014
Benefit programs in accordance with SJSN law by July 1,
2015
Civil servants, military and police must join SJSN by 2029
Jamsostek already manages old-age savings program (JHT);
pension program will be new
Jamsostek already covers formal sector; covering informal
sector will be new
SJSN Pension Program
 Defined benefit -- provides lifetime income protection
 Only civil servants have DB now
 Important lifetime income protection for formal and informal
sectors
 Old-age, disability and survivor benefits
 15+ years of contributions to get pension benefit.
Otherwise get refund of contributions paid
 Benefits based on contribution period and final pay
 Benefit sufficient to “maintain standard of living” and “fulfill
basic needs”
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SJSN Pension Program
 No credit for work prior to plan establishment and no
benefit for workers already over retirement age
 No benefit formula stipulated
 Unclear how to measure income for informal sector
 Financing issues complex due to population aging
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SJSN Pension Program
Population by Age Ranges
100%
90%
80%
70%
60%
60 +
50%
15 - 59
0 - 14
40%
30%
20%
10%
0%
2007
8
2010
2020
2030
Year
2050
2070
SJSN Pension Program
Sample Design
 Eligibility = retirement, death or total and permanent
disability
 Retirement age = 60
 Retirement Benefit = 0.5% of average wages for each year of
contributions
 20% replacement ratio for full career
 Inflation indexing after retirement
 Contribution rate = 5.25%
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SJSN Pension Program
120,000.0
100,000.0
80,000.0
Beneficiaries
Contributors
60,000.0
40,000.0
20,000.0
2007
2010
2020
2030
2050
2070
 Population aging  higher ratio of beneficiaries to contributors
 Cost increases sharply over time
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SJSN Pension Program
2010
2020
2030
2050
2070
% of GDP
0.0%
0.1%
0.5%
2.0%
2.9%
% of wages
0.0%
0.2%
1.7%
6.3%
9.8%
•Retirement age: Age 60 with 15 years of contributions
•Benefit formula: 0.5% of final average earnings for each year of contributions
•Average cost = 5.25% of wages
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Pensions: Financing Issues
 Funding options
 Pay-as-you-go  increasing costs over time
 Level funding  large reserves
 Issues
 Individual equity
 Reserve management
 Politics of cost increases or benefit reductions
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Pensions: Level Funding, Base Plan
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
Reserve as % of
GDP
15.0%
Profit/loss as % of
GDP
10.0%
5.0%
0
2007
(5.0%)
2017
2027
2037
2047
2057
2067
2077
Year
Revenue = Contributions + interest on reserves
Expenditure = Benefit payments + administrative expenses
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SJSN Pension Program and
Severance Pay
 Severance pay in Indonesia highest in the region -- on paper
 Poor substitute for pension program
 Poor substitute for unemployment insurance program
 One reason for lack of formal sector growth and high youth
unemployment
 SJSN offers opportunity for "grand bargain"
 Formal sector gets SJSN pension program
 Severance pay reduced and funded or eliminated and replaced
with unemployment insurance
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SJSN Old-Age Savings Program
 Defined contribution
 Pays lump-sum at retirement age, disability or death
 Limited withdrawals prior to retirement age
 Portion can be withdrawn after 10 years
 Elucidation indicates this is in preparation for retirement
 Minimum investment return guarantee equal to 1-year
deposit interest rate at State-owned banks
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SJSN Old-Age Savings Program
 Formal sector has JHT program; civil servants, military and
police do not have DC program
 Contribution rate not defined in SJSN law
 Benefits depend on rate of investment return and controlling
expenses
 Governance of asset management not defined in SJSN law
and is critical to program success
 High risk of corruption
 High risk of inadequate investment return and/or inappropriate
investments
 Size of fund assets may overwhelm local markets
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SJSN Old-Age Savings Program
 Assume contribution rate is 3% of pay
 Individual’s benefit at retirement depends on:
 Wages and the pattern of wage changes
 Rate of return on investments
 Periods of absence from the labor force
 Investment management and administrative expenses
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SJSN Old-Age Savings Program:
Benefit at Retirement
Years of Contributions
5
10
15
20
25
30
35
40
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Salary Multiple
1.9
3.9
6.0
8.2
10.5
13.0
15.5
18.2
SJSN Old-Age Savings Program:
Impact of Rate of Return
Real Rate of Return
Years of
Contributions
5
10
15
20
25
30
35
40
19
3%
1.9
3.7
5.6
7.5
9.3
11.2
13.0
14.9
4%
5%
1.9
3.9
6.0
8.2
10.5
13.0
15.5
18.2
2.0
4.1
6.5
9.1
12.0
15.1
18.6
22.5
SJSN Old-Age Savings Program:
Total Assets
Year
5
10
15
20
20
% of GDP
5.2%
10.1%
14.4%
18.0%
Conclusion
 Both retirement programs present complex implementation
challenges
 Financing challenges for pension program
 Asset management challenges for old-age savings program
 Programs must be designed, implemented and actively
managed with great care
 SJSN implementation offers opportunity to deal with
severance pay issue on win-win basis
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