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Equitable and Sustainable Pensions

Chapter 17. Pension Reform Experience in Indonesia

Benedict Clements, Frank Eich, and Sanjeev Gupta
Published Date:
March 2014
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Iene Muliati and Mitchell Wiener 


The government of Indonesia will implement a new National Social Security System (referred to as Sistem Jaminan Sosial Nasional or SJSN) during the three years beginning in 2013 that, when fully implemented, will radically transform the structure of the social security system in Indonesia. The legal bases for these changes are Law No. 40/2004 on the National Social Security System (referred to as the SJSN law) and Law No. 24/2011 on Social Security Administrative Bodies (referred to as Badan Penyelenggara Jaminan Sosial or the BPJS law).

The SJSN law was enacted in 2004 and created five national social security programs—a health program and four employment programs (work accident, old-age savings, pension, and death benefits) that will eventually cover all Indonesians, including formal and informal sector workers, and provide the same benefits for all. The bodies formed under the BPJS law will be responsible for collecting contributions from workers, employers, and the government to finance promised benefits, and contributions will be placed in separate social insurance funds for each program. Formal sector workers and their employers will make contributions as a percentage of wages; informal sector workers will contribute a flat amount in rupiah (Rp) and the government will make contributions for the poor that will also be a flat amount in rupiah.

The enactment of the BPJS law in November 2011 marked the end of a long debate about the administration of the national social security programs and cleared the way for the design and implementation of those programs. The BPJS law established BPJS Kesehatan (BPJS Health) to administer the SJSN health program and BPJS Ketenagakerjaan (BPJS Employment) to administer the SJSN employment programs. It transforms the current administrators, PT Askes (Persero) and PT Jamsostek (Persero), from state-owned enterprises to BPJS Health and BPJS Employment, respectively, and changes their legal form to public legal entities. By law, the BPJS are to start their operations on January 1, 2014. BPJS Health is to start offering the SJSN health program on January 1, 2014, while BPJS Employment is to start offering the SJSN employment programs on July 1, 2015.

The enactment of the BPJS law is a significant step in the implementation of the SJSN, but much work remains to be done. Since the enactment of the BPJS law, the government has been working on road maps that will provide guidance for the implementation of BPJS and SJSN programs. The road map for the implementation of BPJS Health and the SJSN health program was launched in December 2012, while the road map for the implementation of BPJS Employment and the SJSN employment programs is expected to be launched and finalized in 2013.

This chapter discusses the effects of the implementation of the SJSN and BPJS laws on the Indonesian pension system. To understand the purpose and effect of the SJSN implementation, this chapter also gives a brief overview of the current programs and their challenges, a brief overview of the SJSN law and the BPJS law, key features of future SJSN programs, potential issues for its implementation, and key required actions for reform. This chapter is based on the SJSN law, the BPJS law, and discussions with the road map team and several members of the government who were responsible at the time for the implementation of the SJSN system. Although this chapter discusses critical issues and possible implementation actions, implementation remains at an early stage and much more work remains. This chapter primarily focuses on the two retirement programs (pension and old-age savings). Other programs covered by the existing system and the SJSN system, such as health, work-accident, and death benefits, may be briefly mentioned but are not included in the discussion in later sections of the chapter.

Current Pension Systems in Indonesia

Historical Context

Pension programs were offered to civil servants during the Dutch occupation period and were reaffirmed in 1956 when the president enacted a law on pension spending. Civil service pension rules were once again revised in 1969 with the issuance of Law No. 11/1969, which is still in effect. Civil servants and the armed forces participate in defined-benefit (DB) schemes only and receive pre- and postretirement life insurance, lump sum benefits, and monthly pensions after retirement. Pension programs for civil servants and members of the armed forces are very much the same although they are based on different laws.

The issuance of the civil service pension law in 1969 and the introduction of tax incentives for pensions in 1983 created interest among social organizations and state-owned enterprises in providing pensions to their employees and resulted in the establishment of Yayasan Dana Pensiun (a form of nonprofit foundation under the civil code that managed pension programs) and supported the growth of pension funds in Indonesia.

Formal private sector workers have been participating in a scheme providing lump sum benefits at retirement since 1977. The scheme was initially established as endowment insurance bundled in a social insurance program for formal sector workers. It was run by PT Astek (Persero), a state-owned company. The scheme was changed to a provident fund in 1992 when Law No. 3/1992 on social security programs for workers was enacted. At that time, PT Astek (Persero) was changed to PT Jamsostek (Persero), which then assumed responsibility for managing the provident fund. There are four programs—old-age savings, death benefits, work accident, and health insurance. Employers can opt out of PT Jamsostek’s health program if they provide a separate health program with the same or better benefits. PT Jamsostek programs are mandatory for companies with more than 10 employees or with a monthly payroll of at least Rp 1 million1 (approximately US$100).

The existence of private pension funds can be tracked back to the early 1970s, when several employers registered their pension funds with the Minister of Finance. Law No. 11/1992 (referred to as the Pension Fund Law) was introduced to regulate voluntary occupational private pension programs offered by private sector employers to their workers, to provide voluntary pension funds for individuals, and to emphasize the importance of voluntary private pension funds in providing old-age income. A pension fund is a separate legal entity from its founder and cofounder(s). This specification is made to ensure the separation of pension assets from the assets of the founders and cofounders. The law also stipulates two types of pension funds, which are further defined by the following government regulations:

  • Government Regulation No. 76/1992 concerning Employer Pension Funds, which can offer either DB or defined-contribution (DC) programs to employees of the sponsoring employer or employees of a cosponsor.
  • Government Regulation No. 77/1992 concerning Financial Institution Pension Funds, which are DC programs open to employees and the self-employed who wish to accumulate retirement savings through supervised and regulated tax-sheltered group vehicles offered by approved banks and insurance companies.

To set up an Employer Pension Fund (EPF) or a Financial Institution Pension Fund (FIPF), the company has to apply for a legal license from the Ministry of Finance.

The issuance of Law No. 13/2003 on Labor (referred to as Labor Law 13/2003) required employers to provide mandatory termination indemnity DB plans to all permanent private sector employees, about one-third of the total workforce. Upon termination of employment, regardless of the reason, the employer is obliged to provide severance pay and long-service pay in a lump sum. The payment of severance benefits under Labor Law 13/2003 is solely the responsibility of the employer and is regulated under manpower rules.

Indonesia’s experience during the 1997–98 financial crisis showed that the country’s social protection system was not sufficiently robust to protect citizens against the severe ramifications of the financial crisis, which included a sharp drop in real GDP, large increases in unemployment, currency devaluation, and declining real wages and income. As a result, the Indonesian Constitution was amended to require the establishment of a national system of social protection. In 2004, the government issued the SJSN law and planned to fully implement the system in 2009. However, the implementation process was delayed because of the lack of a law on social insurance administrators. Consequently, SJSN implementation did not begin until the BPJS law was enacted in November 2011.

Issues with the Current Arrangements

The SJSN and BPJS laws were enacted to implement the system required by the Indonesian Constitution and to solve several key shortcomings of the current system.

Equity and sustainability

The current pension system is fragmented and varies by labor market groups—civil servants, the military, and formal sector workers. As shown in Tables 17.1, 17A.1, and 17A.2 (see Appendix 17A), each segment has a different legal basis and different types of benefits and contributions, thereby creating inequality in membership and benefit coverage. Each segment also has a different administrator, and supervision and enforcement is a challenge. (The government also sponsors a variety of targeted social assistance programs for the poor and vulnerable; however, this chapter does not discuss these social assistance programs.)

Table 17.1Benefits and Contribution Rates for Current Programs
Civil Service PensionPT Jamsostek’s Old-Age SavingsPrivate PensionsMandatory Termination Allowance
Normal retirement age56 or age 50 with 20 years of service55 or 5 years of contributions for terminationCommonly 55; maximum 60As per prevailing law
Program formula (percentage of pensionable wages)
Pensionable wagesBasic salary plus family allowance
Accrual rate2.5% for each year of service5.7%Maximum: DB: 2.5%/year; DC: 20%/year
Maximum75% of basic salaryn.a.DB: 80%; DC: 20%/year
Benefit payment modeAnnuity benefit for lifeLump sum payment of accumulated contributions plus the declared rate of return on account balances and contributions20% lump sum; 80% monthly pension for lifeLump sum benefit varies by years of service
Contribution (percentage of pensionable wages)
Employee4.75%Formal sector worker: 2%Informal sector worker:2% of income (“income” set up at minimum wage level of Rp 1million/month)Maximum: 60% of employer’s contributions

The total contributions in a year shall not exceed 20% of pension base earnings
EmployerPAYG, varies by actual expenditureFormal sector worker: 3.7% Informal sector worker: NoneDB: Paid monthly or annually, depending on actuarial valuation

DC: As set out in the EPF or FIPF regulation
PAYG, fully paid by employer
Number of participants1.9 million beneficiaries receiving pensions (June 2012) 4.5 million active civil servants, that is, contributors (June 2012)Formal sector workers: 9.3 million active contributors (2010) Informal sector workers:

Approximately 400,000 members in at least one of the four programs
2.8 million active contributors (2010)
Total assets (Rp trillion)100 (including non-investment assets)

Based on PT Taspen annual report 2011
99, based on PT Jamsostek annual report 2011130 (2.03% of GDP)

Based on Bapepam LK Pension Fund Report 2010
Source: Authors’ compilation.Note: DB = defined benefit; DC = defined contribution; n.a. = not applicable; PAYG = pay as you go.
Source: Authors’ compilation.Note: DB = defined benefit; DC = defined contribution; n.a. = not applicable; PAYG = pay as you go.

As of 2012, only about 12 percent of the total labor force of 114 million was covered; much of the formal sector and the entire informal sector are not covered.

All civil servants and the military participate in the civil service pension program. PT Taspen data provide information on the employment structure for civil servants. As shown in Table 17.1, there were 4.5 million active civil servants and 1.9 million beneficiaries. Panel 1 of Figure 17.1 shows that active contributors peak with the 45–49 age group, resulting from past hiring patterns.

Figure 17.1Active Contributors to and Beneficiaries of Civil Service Pensions by Age and Gender, December 2010

Source: Taspen data as of December 2010.

Panel 2 of Figure 17.1 shows beneficiaries as of December 2010. This distribution peaks with the 60–64 age group, but there are a significant number of beneficiaries who are 80 or older. Panel 2 also shows that female beneficiaries live longer than male beneficiaries. About 59 percent of beneficiaries are old-age or disability pensioners, and approximately 35 percent of beneficiaries are spouses of deceased workers. The remaining beneficiaries include children and parents.

Panel 1 of Figure 17.2 shows the change in the program’s dependency ratio. The dependency ratio—the ratio of the number of beneficiaries to the number of active contributors—was about 42 percent in December 2010. Under current conditions, this ratio will increase rapidly because of the temporary surge in retirement that will occur during the next 20 years, and less rapidly but continuously thereafter; it is expected to exceed 100 percent eventually if no change is made in the eligibility conditions for retirement.

Figure 17.2Civil Service Pension: Active Contributors, Beneficiaries, Dependency Ratio, and Changes in Membership

Sources: Authors’ calculations based on Taspen data as of December 2010 (panel 1); Taspen (2012); Ministry of State Apparatus and Bureaucracy Reform website; and Badan Kepega-waian Negara (BKN) website (panel 2).

Panel 2 of Figure 17.2 shows that growth in the number of civil servants and beneficiaries is sporadic and concentrated in certain years. In 2012, the workforce reduction was caused by a temporary moratorium on civil service recruiting. The average growth rate of the number of active civil servants is less than the growth rate of civil service pension beneficiaries. This trend is likely to continue for another 10–15 years because the large number of civil servants hired in the mid-1970s and early 1980s are now reaching retirement age. Data on military and police personnel are not as readily available as for civil servants.

Although all civil servants participate in the civil service pension program, the current pension has an adequacy issue. The benefit is calculated using final base pay, but results in only a small percentage of the total take-home pay received by civil servants, especially for mid-level to senior officials. Consequently, the pension benefit received by mid- to high-level officials can be highly inadequate compared with the total compensation they were receiving before retirement. For highly paid civil servants, pensions can be less than 20 percent of total pay at retirement. Thus, the current pension program does not guarantee adequate income following retirement, forces civil servants to look for other sources of retirement income, and may provide an incentive for corruption. Reform of the design is necessary to generate benefits that are equitable across all pay levels, to align it with the government’s reforms to the bureaucracy and to pay levels, and to ensure program sustainability.

Almost all formal sector employers and their workers are required to participate in the social insurance programs offered by PT Jamsostek (Persero). However, as of 2012, out of 34 million formal workers, only 10.9 million, or approximately 32 percent, participated in and actively contributed to PT Jamsostek’s old-age savings program, indicating high levels of evasion from the mandatory contribution requirement for this program. Table 17.2 shows the history of membership in PT Jamsostek’s old-age savings program. Total membership in PT Jamsostek’s old-age savings program for both active and inactive2 accounts has grown since 2006. However, the number of inactive accounts has grown more rapidly than active accounts. It is likely the number of inactive accounts will decrease sharply in 2014 and 2015 as these amounts are paid out in anticipation of the start of the SJSN old-age savings program and the transformation of PT Jamsostek (Persero) to BPJS Employment.

Table 17.2Membership in PT Jamsostek’s Old-Age Savings Program

The number of employers participating in PT Jamsostek’s old-age savings program has also increased and at a more rapid rate than the number of participating workers. Consequently, the average number of active workers per active employer has dropped from 93.7 in 2006 to 69.9 in 2010. Inactive employers are those that have become bankrupt or merged with another company. Note that inactive workers are not just employees of inactive employers. They can also be workers who have left employment with active employers and not received distribution of their account balances.

The benefit under PT Jamsostek’s old-age savings program is paid as a lump sum instead of as a monthly annuity. There is no guarantee that employees will invest this lump sum wisely for future income security after retirement. Furthermore, the PT Jamsostek account balance can be withdrawn if a worker becomes unemployed, has contributed to the program for five or more years and has been unemployed for six months or more. This capability further reduces the size of the account balance available at retirement.

Table 17.3 shows the reasons for payouts in 2010 and 2011. The vast majority of distributions are early withdrawals. The table clearly shows that the program is not serving its primary purpose of accumulating savings for retirement. It may also indicate system abuse; there is anecdotal evidence that workers leave to receive their accumulations and are quickly rehired, or they move from one covered employer to another and improperly receive their accumulated contributions.

Table 17.3Reasons for Payouts in 2010 and 2011
Type of Claim2010

(number of claims)


(number of claims)

Growth rate

Age of 55 years61,8167.1266,3327.337.31
Leaving Indonesian territory6330.076360.070.47
Permanent disability450.01430.00−4.44
Becoming state official12,3331.427,8970.87−35.97
Five years of membership (early withdrawal)773,31189.12808,15089.314.51
Passed away19,5852.2621,8692.4211.66

In addition to PT Jamsostek’s mandatory program, formal workers may also participate in voluntary private pension programs sponsored by their employers.

Table 17.4 provides information on private pension fund membership in both employer-sponsored and individual private pension programs under FIPF. It shows that the number of participants in employer-sponsored pension programs (DB and DC combined) is about equal to the number of participants in individual DC programs.

Table 17.4Numbers of Participants and Beneficiaries of Employer Pension Fund and Financial Institution Pension Fund
(1) Active participants of Employer Pension Fund923,023903,981−19,042−2.1
(2) Inactive participants of Employer Pension Fund455,965478,76022,7955.0
a. Pensioners289,488305,51516,0275.5
b. Widows and widowers96,271101,5945,3235.5
c. Children2,8502,898481.7
d. Deferred vested employees67,35668,7531,3972.1
(3) Participants of Employer Pension Fund: (1) + (2)1,378,9881,382,7413,7530.3
(4) Active participants of Financial Institution Pension Fund1,197,0651,322,684125,61920.0
a. Individual participants461,359546,27084,91110.5
b. Group participants735,706776,41440,70818.4
(5) Inactive participants of Financial Institution Pension Fund (deferred vested)105,180112,5727,3927.0
(6) Numbers of Financial Institution Pension Fund participants: (4) + (5)1,302,2451,435,256133,01110.2
Total numbers of pension fund participants: (3) + (6)2,681,2332,817,997136,7645.1

Table 17.5 shows that the numbers of employer-sponsored DB plans has been declining, but the number of such plans is still much larger than the number of employer-sponsored and individual DC programs combined. It also shows that many DB pension funds were shut down between 2006 and 2010, primarily because of employer bankruptcy, financial problems, and mergers and acquisitions. And as mentioned in the previous section, the introduction of mandatory severance pay has also affected the growth of private pension funds in Indonesia.

Table 17.5Number of Private Pension Programs in Indonesia
Active Private Pension Funds
Employer Pension Funds, defined-benefit plan235226216210208
Employer Pension Funds, defined-contribution plan3736394140
Financial Institution Pension Funds2526262524
Terminated Private Pension Funds
Employer Pension Funds, defined-benefit plans6877889698
Employer Pension Funds, defined-contribution plans2326262829
Financial Institution Pension Funds1011111213

Labor Law No. 13/2003 requires employers to pay DB termination indemnities to permanent employees upon termination. The benefit under the law varies by years of service. The law does not require funding of the severance pay benefit, but its accrued liability and accounting expenses must be recognized in the company’s financial statements. This requirement can have a significant effect on a company’s net worth and profitability, particularly for publicly listed companies. For those companies that were providing employer-sponsored private pension plans before enactment of the law, it meant additional labor costs. Therefore, some companies simply terminated their private pension programs or postponed their plans to provide them to their employees, eroding the growth of private pension programs. Because the benefit is not funded, workers cannot be sure they will receive benefits on employment termination.

In addition, because the severance pay benefit is paid as a lump sum, it is unlikely employees will save it for retirement, but rather will spend it immediately. Therefore, the purpose of securing income following retirement is also not met.

Informal workers can voluntarily participate in the PT Jamsostek program. However, as of 2012, out of 80 million informal workers, fewer than 1 million participated. Thus, most informal sector workers, who constitute approximately 60 percent of the total labor force, are uncovered. This lack of coverage creates significant inequality between the formal and informal labor forces and is a serious threat to Indonesia’s goal of providing social protection and reducing poverty in Indonesia given that informal workers are usually the most vulnerable to economic shocks.

The aging of the population may also create another issue for Indonesia’s pension program. Life expectancy in Indonesia has improved significantly. World Bank data show that in 2010, Indonesians’ life expectancy at birth was 71. However, current retirement ages in Indonesia (usually 55 or 56 years old) are quite low relative to life expectancy. Figure 17.3 shows Indonesians’ life expectancy at ages 20, 56, 60, and 65 for men and women.

Figure 17.3Life Expectancy by Age and Gender

Retirement ages currently vary significantly by program and type of group. The standard retirement age for civil servants is 56, but can be extended for certain positions to 60, 62, 65, or 70 based on the government’s needs. Civil servants can retire as early as age 50 with a minimum of 20 years of service. More than 1 million civil servants are age 50 or older and approaching the standard retirement age of 56, so most of the group is already eligible for immediate retirement without actuarial reduction (see panel 1 of Figure 17.1). There will be a surge in retirement during the next 20 years.

Most private sector employees retire at age 55 but some are eligible for early retirement as early as age 45. Low retirement ages result in short contribution periods and longer periods for receiving benefits, putting significant pressure on the system. Therefore, the retirement age needs to be increased now, and increased further as life expectancy improves, for the system to be able to pay adequate benefits and maintain fiscal sustainability.

Governance: Lack of oversight and transparency

Current reporting procedures for the civil service pension program do not give an accurate and transparent view of the financial status of the program. Cash accounting is used for pension expenses in the government’s financial statements. Although pay-as-you-go (PAYG) funding is acceptable, PAYG accounting is not consistent with international accounting principles and does not allow accounting costs to be easily and equitably allocated to subnational government units. Proper disclosure of the program’s unfunded liability, expenses for accruing pension benefits, and interest expenses is necessary. See Table 17.6 for the civil service pension system’s report of assets.

Table 17.6Assets and Investments (billion Rp)
Investment assets30,06334,86848,19062,55981,314
Non-investment assets6,9379,31712,47214,60818,683
Total assets37,00144,18660,66177,16799,997
Source: Taspen (2012).
Source: Taspen (2012).

The PT Jamsostek provident fund has also been under public observation for years, and employer associations, labor unions, and international organizations have criticized its design and operation. Disclosure was poorly managed by PT Jamsostek (Persero) until recently. Although it now publishes annual financial statements in national newspapers, it has not satisfactorily informed the public about the management of its assets and liabilities. Moreover, disclosure of benefit information to participants is also lacking. Some participants may have received an individual benefit statement but the majority do not know the amount of their contributions and accumulated account balances.

At about 2 percent of GDP, Indonesia’s ratio of pension assets to GDP is lower than in neighboring countries. That said, a higher ratio of pension assets to GDP guarantees neither the adequacy of a pension system nor a higher rate of economic growth. Rather, adequacy depends on the pension system structure itself, the development of local capital markets, and other factors. Nonetheless, the lack of pension asset management supervision, control, and transparency under the mandatory pension plans is a major impediment to pension asset growth, especially for the civil service pension program and PT Jamsostek’s old-age savings program. Only private pension programs are strictly regulated by the Ministry of Finance. Good governance and investment policy requirements for private pension programs are set out clearly by the Ministry of Finance, and annual reporting by independent professional auditors and actuaries is required at least once every three years.

Reforming the Pension System

Drivers of Pension Reform

As noted, the 1997–98 financial crisis, together with the shortcomings in the current pension systems, led to recognition of the need to reform the pension system and to the enactment of the SJSN and BPJS laws. Changes are needed to extend coverage, ensure programs meet their objectives, ensure program fiscal sustainability, and improve the overall governance and transparency of the pension system.

However, changes in demographics and culture, a move toward greater democracy and decentralization, and Indonesia’s emergence as a middle-income country with a growing middle class have also been key contributors to the need for reform. Indonesia needs to change its systems and institutions to support its needs as a democratic and rapidly growing middle-income country. Key changes driving the need for reform include the following:

  • Changing demographics. Declining mortality and fertility rates have led to major demographic changes in Indonesia and elsewhere in the world. Life expectancy is increasing at the same time that the total fertility rate is declining, leading to rapidly aging societies. This phenomenon will lead to a large increase in the number of elderly and the requirement for an adequate pension system to meet their income needs. It will also increase pressures on the country’s pension systems as fewer and fewer workers must support an ever-increasing number of elderly.
  • Change in social culture. Urbanization and the decline in the number of children have changed the family and social structures in Indonesia. There are now fewer children to help support their elderly parents than in the past. Children are also leaving their villages and moving to cities in search of more lucrative employment opportunities. Consequently, the family support system is not as robust as in the past and there is a greater need for the state to assist with the establishment of programs and institutions to care for the elderly.
  • Economic growth and the emergence of democracy. Indonesia has enjoyed robust economic growth since its recovery from the 1997–98 financial crisis, the fall of the Suharto regime, and the emergence of more inclusive political institutions. Indonesia’s entry into the Group of 20 created another economic advantage for the country. Indonesia’s more robust economy also minimized the impact of the 2008 global financial crisis, and rapid growth continued. Indonesia needs a pension system that will support and help it sustain its economic growth.
  • Sustained and inclusive economic growth. Indonesia has successfully moved from being a low-income country to being a middle-income country. To help avoid the middle-income trap, avoid increases in income inequality, and sustain inclusive economic growth, Indonesia has developed integrated economic growth and poverty reduction master plans to support Indonesia’s Millennium Development Goal objectives and to ensure income protection and opportunity for all. National social protection programs that extend social insurance coverage to the entire labor force and social assistance programs targeted to the poor and vulnerable are major components of any strategy for and an investment in inclusive and sustained economic growth.
  • Improved government capacity. As a middle-income country, Indonesia’s civil service will be expected to provide greater and more professional services for the population. Meeting these expectations will require a significant increase in the government’s capacity to design, implement, and administer programs to sustain economic growth and social development. As the country makes the transition from low to middle income, the role of the government in social protection will change from social income provider to a combination of social income provider for the poor and vulnerable and regulator of public and private social protection systems to meet the needs of Indonesia’s emerging middle- and upper-class citizens. Successfully making this transition will require the development of much stronger and more sophisticated risk-management capacity within the government of Indonesia.
  • Expanded financial literacy. As a result of economic growth, Indonesia has developed a significant middle class who are more educated, have different needs, and have more money to set aside for retirement. The government cannot meet all of the income protection needs of the country through public programs. Citizens will need to supplement government programs with private savings. Increasing citizen responsibility will require the development of a culture of financial planning and asset management. This step is also necessary to ensure the financial independence and the growth of the private sector. By its constitution, the country is obliged to provide basic protection for its people so they can live with dignity. However, the private sector will need to supplement government services and benefits to relieve fiscal pressure on the government; at the same time, industry must be strictly supervised to educate and protect the public.

Current Reform

Increasing coverage, improving benefits, and ensuring fiscal sustainability are key goals of the pension reform, but establishing the administrative systems and governance structures needed to protect program assets and ensure system efficiency and accuracy is equally important. Key administrative issues include the use of unique identification (ID) numbers by both the BPJS and by the organizations working with the social security administrators and an improved process for governance of the assets in the social security system. More clarity is needed for how the governance structure under the new laws will work in practice. The SJSN and BPJS laws establish a very different governance structure, moving away from a structure based on for-profit administrators reporting to the Ministry of State-Owned Enterprises to a model based on not-for-profit public entities reporting to the president and managing social security trust funds on behalf of participants.

Key features of reform

The BPJS law establishes the governance and administration of the national social security programs. The key provisions of the law are outlined below:

  • Transformation of the current administrators into the BPJS. Under the law, the BPJS will be a public legal entity that is responsible to the president. Unlike the current social security administrators, the BPJS will not be for-profit state-owned enterprises, and the Ministry of State-Owned Enterprises will no longer be responsible for supervising their activities. This brings Indonesia into compliance with established international practice. Social insurance programs should not be a profit center for the government. Rather, they should be established to protect citizens against financial and macroeconomic risk. PT Taspen and PT Asabri (the administrators of the social insurance programs for civil servants and the military, respectively) will be transformed much later, but before 2029. In many countries, civil servants and the military have separate programs from the rest of the population, and Indonesia will need time to integrate these groups into the national social security system.In establishing the BPJS, the assets, liabilities, employees, rights, and obligations of the current administrators will be transferred to the BPJS. The government will also pay in initial capital of not more than Rp 2 trillion each of BPJS Health and BPJS Employment.
  • Governance structures of the BPJS. The BPJS law defines a governance structure with a typical Indonesian two-board setup. The Board of Commissioners will consist of seven members including two government representatives, two employee representatives, two employer representatives, and one public figure. The Board of Directors will consist of at least five members selected on the basis of professional qualifications.Members of both boards serve five-year terms and can be nominated for a second five-year term. For the first two years, the boards of the BPJS will be the same as the boards of PT Askes and PT Jamsostek.
  • Distinction between the assets of social security funds and the assets of the BPJS. The BPJS law improves the legal and financial structure of the social insurance system by legally separating the assets of the BPJS from the assets in the social security funds. The government must first decide on the benefits to be provided under each of the five programs and the required contribution rates. These contributions should be sufficient to fully pay for all benefits and administrative costs for that program. No cross-subsidies among social security funds are permitted.Contributions from employers, workers, and the government and investment income on those contributions will be placed in the appropriate social security fund. These assets can only be used to pay benefits to participants and pay for administrative expenses. The assets in these funds are managed by the BPJS but do not belong to the BPJS. Social security fund assets will be held at the state-owned custody bank.The BPJS’s own assets come from several sources—paid-in capital from the government, assets transferred from PT Askes and PT Jamsostek, and fees charged by BPJS to the social security funds for its administrative services. The BPJS can charge fees equal to a percentage of contributions or a percentage of investment income (or both) to cover its administrative costs for each of the five programs. This structure is similar to that of Indonesia’s mutual funds and private pension funds.The separation of administrator and fund assets in different legal entities and the use of a custodian to hold fund assets are important safeguards for fund members and are consistent with international best practice. In theory, this ensures that BPJS creditors cannot seize fund assets, keeps the BPJS from having direct control of the assets that belong to members, and allows the custodial bank to review the financial transactions requested by the BPJS to ensure they comply with the law. Additional regulations will be needed to ensure the system operates as intended.
  • Risk management. It is important for the government of Indonesia to ensure that the financial risks of the social insurance programs are properly managed. If the contribution rates are set too low relative to promised benefits, or if the contributions and benefits are not periodically adjusted, or if program funds are mismanaged, the social security funds could become insolvent. This prospect creates a potentially large contingent liability for the state budget, which is the ultimate guarantor of fund solvency. Consequently, the government has a strong incentive to ensure the programs are properly managed. This will require the creation of risk-management capability within the government and strong supervision and control of BPJS operations to prevent fraud and corruption, ensure proper financial management, and control operational expenses.
  • Supervision of BPJS. BPJS activities will be subject to both internal and external supervision. The BPJS will be supervised internally by the Board of Commissioners and an internal audit department. In addition, it will be supervised externally by the National Social Security Council, the new Financial Services Authority, and the State Financial Audit Board.
  • Administrative system. BPJS’s responsibilities will include registration of employers and workers (in both the formal and informal sectors); assignment of identification numbers to all members; collection of contributions in cooperation with other government agencies, local governments, and state-owned enterprises (with only public organizations allowed to be involved in the collection of contributions); application of sanctions to nonpayers; processing of claims; verification; monitoring; and reporting. The reporting procedures for BPJS include a requirement to submit to the president semiannual and annual reports. The BPJS must also inform participants about their rights and, at least once per year, the benefits they have earned in the pension and old-age savings programs.

The BPJS is also required to manage the investment of social security fund assets and establish technical reserves based on standard actuarial practice. Finally, at all times, the BPJS must operate the social insurance programs in the best interests of the participants.

Issues with current reform

The SJSN and BPJS laws offer general guidance but leave much of the specifics to regulations, and significant information is contained in the elucidation of the law rather than in the text of the law itself.

Equity and sustainability. One of the primary purposes of the SJSN law is to mandate universal coverage of the formal sector for the SJSN pension program and universal coverage of the entire labor force for the old-age savings program. Because the pension program is mandatory for the formal sector only, informal sector workers will not be eligible to participate and receive monthly lifetime pension benefits. The government may wish to consider offering separate non-SJSN income-protection programs on a targeted or universal basis to informal sector workers. In the long term, the government may want to consider requiring informal sector participation in the SJSN pension system.

In a country in which 65 percent of workers are in the informal sector, achieving universal coverage in an old-age savings program based on payroll contributions is virtually impossible. The informal sector is likely to evade the contribution requirement even though the programs are (theoretically) mandatory. To reach high coverage levels, the program must provide benefits that the informal sector needs and wants, those benefits must be provided at a cost that is affordable, and the process of applying for and receiving benefits must be easy and reliable.

The SJSN law does not define the level of benefits under the DB pension program or the level of required contributions to the DC old-age savings program. The new benefit designs and contribution rates for SJSN pension and old-age savings programs will need to take into account the different characteristics, needs, ability, and willingness to pay contributions of formal and informal sector workers. All these factors will be set by government regulation. The decisions on program design, including levels of benefits and contributions, will have to be made in a highly political atmosphere. Politicians may try to seek short-term gains by offering high benefits with lower than necessary contribution rates and leave financial problems to future generations.

Fiscal sustainability of pension programs depends largely on the number of workers relative to the number of participants receiving pensions. This ratio tends to decrease rapidly in countries that are aging and thus requires adjustments in benefits, contribution rates, or both. Figure 17.4 shows that after 2030, the population begins to age rapidly. The proportion of the population ages 60 and older increases rapidly, while the percentages of the population that are children or are of working age decrease significantly. Population aging will make the financing of the SJSN pension program difficult. On a PAYG basis, the costs of the SJSN pension program, which requires 15 years of contributions to receive a lifetime pension, will start out very low and will grow rapidly as the number of pensioners increases, the population ages, and the system matures.

Figure 17.4Population by Age Ranges


Life expectancy (average of male and female) at retirement age is expected to increase significantly during the next 50 years. This increase in life expectancy has significant implications for pension program design and financing. It means if retirement ages are not increased, benefits will be paid for ever-increasing periods of time and will require increases in contribution rates, decreases in benefit levels, or both.

The design of the SJSN’s old-age savings and pension programs will have to take into account the following factors:

  • It should be recognized that DB programs favor women and vulnerable groups. The primary purpose of pensions is to prevent elderly poverty. Those older than age 80 are predominantly female and often live alone. Because DB pensions guarantee income for life and women generally live longer than men, these programs are vital for women. DB plans can guarantee lifetime income to spouses of breadwinners who die young, as well. Because women have lower labor force participation rates, survivor benefits are more crucial for women than for men. DB programs also help other vulnerable members of the population such as the disabled and the underemployed. Program design can help those with low pay or short service and can give service credit to those who are out of the labor force to raise children or for other reasons.
  • Conversely, DC plans are not favorable to vulnerable groups, including women. Benefits are based only on the accumulated account balance. Those with low pay, higher periods of absence from the labor market or with high periods of unemployment, and those who become disabled or the survivors of people who die at young ages also receive only their accumulated account balance, which is likely to be inadequate.

Governance structures. Although the BPJS reports to the president, it is not clear who in the president’s office will actually be responsible for supervision and control of its operations. The National Social Security Council is responsible for synchronizing the administration of the SJSN system, but it is not clear what its specific functions are. The law also states that the new Financial Services Authority is responsible for external supervision, but does not clarify its functions. Given the huge amounts of money that will flow into the two BPJSes and the critical role they will play in the social protection system for the country, the roles, functions, accountability, and responsibility for each of the supervisory bodies must be clearly stated in writing and agreed to by all parties.

Organizational transformation and readiness. Significant changes in PT Jamsostek’s legal, governance, and organizational structures; job descriptions; business processes; and information technology systems will be needed as it transforms from a state-owned organization managing programs for a particular labor market segment to BPJS Employment managing nationwide programs covering thousands of employers and millions of informal sector workers. BPJS Employment will also need to implement a new pension program and manage an old-age savings program that will eventually be significantly larger than the existing old-age savings program that it manages today.

For the social security programs to be properly administered, it is important that everyone receives a unique ID number. The Ministry of Home Affairs is working on an electronic ID program, but the time frame for its rollout is unclear. It likely will not be ready in time for the start of the SJSN health program. This means that BPJS Health will likely need to develop a separate ID number solely for the SJSN system. Once again, it makes no sense for the two BPJSes to separately issue ID numbers. Instead, BPJS Health and BPJS Employment must work together to ensure that the ID numbers are issued and are unique—everyone has one and only one number.

Another set of concerns relates to the collection of contributions. The first issue is unnecessary duplication—both BPJSes are charged with collecting contributions from the same employers and individuals. A second issue is making sure that the required contributions are paid on time and in the correct amount. It is good that the BPJSes have been given the right to impose administrative sanctions for non-compliance. PT Jamsostek does not have that authority, making enforcement difficult and leading to widespread evasion. Despite the availability of administrative sanctions, collecting from millions of informal sector workers individually and from micro-enterprises will prove very challenging.

Program design and contributions required and their impact on the labor market. It is important to understand that social insurance programs—programs that are financed by payroll taxes on employers and workers—raise serious labor market, labor relations, and macroeconomic issues. Employers and workers will both be required to pay contributions to the health, pension, and old-age savings programs, while the work accident and death benefit programs will be fully financed by employers. These contributions will be a percentage of covered payroll. If benefit programs are too generous, then the contribution rates could be high enough to create hiring disincentives. The payroll taxes, in combination with the recent large increase in minimum wages in some parts of the country and new restrictions on outsourcing and contract employment, could have a serious negative impact on employment.

Indonesian policymakers need to be realistic about the true cost of the government’s social security programs and the affordable level of benefits. If programs are properly priced, employers and workers will be forced to make a choice between paying higher contributions or receiving smaller benefits.

Impact on the growth of private pension programs. Opting out of the SJSN social insurance programs will not be allowed, which may discourage employers who already have voluntary pension programs from continuing them. The total costs of pension promises may become too high for employers to bear. Because the pension benefit formula and level of contributions to the old-age savings fund are not prescribed in the draft law, but must be developed in supplemental regulations, early assessment of total costs is not yet possible. If pension benefits and old-age savings fund contributions are set high in government regulations, the existence of voluntary pension programs will be adversely affected. Employers will tend to satisfy their obligation to the mandatory program before funding voluntary ones.

The commercial interests of banks and life insurance companies may also be affected by the implementation of the SJSN system. While making pension programs compulsory and publicly managed may help avoid adverse selection, centralizing the management of fund assets with the government may destroy the pension businesses of banks and life insurance companies; therefore, the government should carefully consider its role and that of the private sector and individuals in securing future income protection.

Tax. Taxation of contributions and benefits is not described in the legislation. The BPJS managing the programs will be not-for-profit entities and will not be taxed at all. Although it is understood that taxation is more appropriately taken care of within tax legislation, a proper description of the general framework of taxation may avoid ad hoc treatment, which has frequently plagued all of the existing pension programs and is one of the contributing factors to the low rate of participation in the voluntary pension schemes.

Concluding Comments

The enactment of the BPJS law is a significant step in the implementation of a social protection system for all Indonesians. However, much work remains to be done to design the individual programs, calculate appropriate contribution rates, and properly manage the governance and financial risks associated with these programs.

The government of Indonesia should learn from other countries’ experiences, especially from those countries whose systems have already been in operation for more than 15 years. It is also necessary to conduct regular socialization on program design and proposed contribution rates so employers and workers are aware of the program’s benefits and requirements. This is particularly important to avoid any misperceptions about the system that can be exploited for political purposes.

Appendix 17A. Structure and Benefits of the Current and SJSN Programs
Table 17A.1Structure and Benefits of the Current Program
Type of ProgramType of WorkerCurrent System
Civil Service PensionCivil servantsPension-DBMandatoryPT Taspen
Military and policePension-DBMandatoryPT Asabri
PT Jamsostek’s Old-Age SavingsPrivate sector workersDC:
  • Work-accident
  • Old-age savings
  • Death benefits
  • Health
Mandatory, except for health (opt out is possible)PT Jamsostek, but

PT Jamsostek optional for health
Informal sector workersDC:
  • Work-accident
  • Old-age savings
  • Death benefits
  • Health
VoluntaryPT Jamsostek
Voluntary Occupational Private PensionPrivate sector workersDB or DCVoluntaryEPF
Mandatory Termination AllowancePrivate sector workersDBMandatoryNone
Source: Authors’ compilation.Note: BPJS = Badan Penyelenggara Jaminan Social; DB = defined benefit; DC = defined contribution; EPF = Employer Pension Fund; FIPF = Financial Institution Pension Fund; SJSN = Sistem Jaminan Sosial Nasional; THT = Endowment Savings Program.
Source: Authors’ compilation.Note: BPJS = Badan Penyelenggara Jaminan Social; DB = defined benefit; DC = defined contribution; EPF = Employer Pension Fund; FIPF = Financial Institution Pension Fund; SJSN = Sistem Jaminan Sosial Nasional; THT = Endowment Savings Program.
Table 17A.2Structure and Benefits of Future Programs
Type of ProgramType of WorkerFuture System (SJSN)
Civil Service PensionCivil servants Military and police
  • Health
  • Work-accident
  • Old-age savings
  • Pension
  • Death benefits
  • BPJS Health for health program
  • BPJS Employment for employment programs
Voluntary supplemental program may be provided to civil servants and armed forces under other systems outside the SJSN to maintain current levels of benefits enjoyed by these groups
PT Jamsostek’s Old-Age SavingsPrivate sector workers
  • Health
  • Work-accident
  • Old-age savings
  • Pension
  • Death benefits
  • BPJS Health for health program
  • BPJS Employment for employment programs
SJSN pension program is currently not offered to informal sector workers.
Informal sector workers
  • Health
  • Work-accident
  • Old-age savings
  • Death benefits
Voluntary Occupational Private PensionPrivate sector workersVoluntary supplemental program may still be provided to private sector workers to maintain current level of benefits enjoyed by these groups, however, it is purely the employers’ decision.
Mandatory Termination AllowancePrivate sector workersThis program may need to be revisited upon implementation of SJSN programs.
Source: Authors’ compilation.Note: BPJS = Badan Penyelenggara Jaminan Social, DB = defined benefit; DC = defined contribution; EPF = Employer Pension Fund; FIPF = Financial Institution Pension Fund; SJSN = Sistem Jaminan Sosial Nasional, THT = Endowment Savings Program.
Source: Authors’ compilation.Note: BPJS = Badan Penyelenggara Jaminan Social, DB = defined benefit; DC = defined contribution; EPF = Employer Pension Fund; FIPF = Financial Institution Pension Fund; SJSN = Sistem Jaminan Sosial Nasional, THT = Endowment Savings Program.

    Capital Market and Financial Institution Supervisory Agency2011Pension Funds Annual Report 2010 (Jakarta).

    Jaminan Sosial Tenaga Kerja (Jamsostek)2011Annual Report 2010 (Jakarta).

    Jaminan Sosial Tenaga Kerja (Jamsostek)2012Annual Report 2011 (Jakarta).

    Taspen2012Annual Report 2011 (Jakarta).

    United Nations2011World Population Prospects: The 2010 RevisionPopulation Division (New York, New York: United Nations)

    World Bank2010World Development Indicators (Washington: World Bank).


In mid-2013, 1 U.S. dollar was approximately 9,929 Indonesian rupiah.


Active accounts are for those workers who are still making regular contributions to PT Jamsostek’s old-age savings program. Inactive accounts are for those workers who are no longer making regular contributions but who have not yet begun to withdraw their account balances.

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