Indonesia pension system risks youth

According to East Asia Forum, Indonesia is preparing to take advantage of its demographic dividend by improving job prospects for the younger population, boosting technology-based skills, and improving education. However, it is only expected that the demographic dividend will remain until 2045. Not much has been done to prepare for the aging of the population that will soon come. Concerns over the longevity of the demographic bonus era have been expressed because the productive population lacks economic stability during their later years.

According to data from Indonesia’s National Social Security Council, just 35.8 million of the country’s 146.6 million active workers were covered by old age-related income protection schemes in 2023. Less than fifteen percent of workers have made any kind of retirement preparation.

Elder poverty may increase as a result of low old-age employment insurance participation rates. Presently, more than 40% of Indonesia’s senior population is impoverished. According to a PRAKARSA study, the majority of elder generations’ assets are made up of housing. Which is frequently hard to translate into quick financial help.

It is anticipated that the percentage of Indonesians sixty years of age or older will rise from 11.8 percent (33.7 million) in 2025 to 15.8 percent (48.2 million) in 2035. The urgent need to address the financial vulnerabilities of the older population post-demographic dividend is highlighted by a simultaneous increase in life expectancy. In order to guarantee the well-being of the aging population in the upcoming years, these concerns are extremely concerning and demand attention.

READ MORE:

Generative AI: A threat or a driver of human creativity?

OpenAI employees report a high-risk, punishing culture

Xi promises to prioritize youth employment in China

Indonesia has made improvements to the accessibility of income security programs relating to old age over the past 20 years. The National Social Security System was given a regulatory framework for social security administrators, board councils, programs, and the handling of social security money in 2004 with the crucial passage of Law No. 40, also known as the SJSN law. Additionally, two programs designed especially for the elderly are governed by this law. Jaminan Pensiun (Pension or JP) and Jaminan Hari Tua (Old Age Savings or JHT). The Social Security Administrator for Employment, or BPJS Ketenagakerjaan, has been in charge of these programs since 2015.

However, due to their sluggish membership growth rates and the associated risk of unsustainable funding, these two income security schemes related to old age are experiencing significant issues. Between 2015 and 2022, the number of individuals actively engaged in JHT and JP rose. Respectively, from 13.1 to 17.8 million and from 6.48 to 14 million. Even with this increase, the percentage of active participants in Indonesia’s workforce fell short of 20% in 2022.

The Indonesia government has made significant strides in creating employment social security systems in response to these obstacles. It has expanded benefits for members to include work accident and death insurance as well as, more recently, unemployment insurance. Governments at the federal and provincial levels are working together to boost membership even more. A Presidential Instruction (Inpres) with award-based incentives and third-party premium coverage was implemented by the federal government in 2021 to promote more membership. Furthermore, several municipal and provincial governments have made contributions by covering the premiums for employees in the unorganized sector.

Indonesia’s pension scheme has a major obstacle despite these efforts: it has little power to increase the number of participants. As per the SJSN statute, participation in the program is restricted to persons working in the formal sector, at least until 2029. However, the structure of Indonesia’s labor market is typified by a sizable informal sector. Which will account for 58% of the country’s workforce in 2021.

The poor program participation rates give rise to two noteworthy issues. First off, if beneficiaries rise but contributions stay small, their capacity to support members as they age may be jeopardized. This is particularly troubling for JHT, given the most prevalent claim, accounting for 57% of instances, is resignation. This illustrates JHT’s incapacity to safeguard users’ finances as they age since the fund is typically thought of as a short-term savings option. Thus, the long-term financial viability of social security for the elderly is put at risk.

In order to address these issues, the government should integrate informal workers into the system. Particularly for JP, and provide contribution subsidies to those who are unable to pay.

The idea here is that the more individuals who participate, the better. Especially since pension payments are paid out monthly once a member has contributed for at least 15 years on average. Projections from the International Labour Organization indicate that JP’s solvency will only survive until 2043. At which point the fund’s caution will be called into doubt. The program’s expenses are predicted to exceed the total yearly income from contributions, investment returns, and other sources by 2050.

Additionally, in order to address problems like fraud and the possibility of benefit payments failing, the Indonesian government has to regulate pension fund management immediately. The public in Indonesia is becoming less trusting of insurance companies as a result of recent incidents involving Bumiputera and Jiwasraya. These are two significant insurers that are regarded as too big to fail.

One of the first items on the table should be pension reform as Indonesia installs a new administration. Setting pension reform as a top priority would help the elderly population financially. It would be a vital step in maintaining economic stability in the post-demographic dividend period.