1. Mitchell Wiener 15 December 2011 ILO Expert Meeting Social Security and Social Protection Floor Pension Reform in Indonesia

2. Agenda 2 SJSN law and retirement income BPJS law and retirement income Program design and implementation challenges

3. SJSN Law 3 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

4. BPJS Law 4 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

5. BPJS Law 5 PT Jamsostek transformed into BPJS Employment BPJS Employment manages pension programs (plus worker 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

6. SJSN Pension Program 6 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”

7. SJSN Pension Program 7 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

8. SJSN Pension Program 8

9. 9 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%

10. SJSN Pension Program 10 Population aging  higher ratio of beneficiaries to contributors Cost increases sharply over time

11. SJSN Pension Program 11 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 20102020203020502070 % of GDP0.0%0.1%0.5%2.0%2.9% % of wages0.0%0.2%1.7%6.3%9.8%

12. Pensions: Financing Issues 12 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

13. Pensions: Level Funding, Base Plan 13 Revenue = Contributions + interest on reserves Expenditure = Benefit payments + administrative expenses

14. SJSN Pension Program and Severance Pay 14 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

15. SJSN Old-Age Savings Program 15 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

16. SJSN Old-Age Savings Program 16 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

17. SJSN Old-Age Savings Program 17 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

18. SJSN Old-Age Savings Program: Benefit at Retirement 18 Years of ContributionsSalary Multiple 51.9 103.9 156.0 208.2 2510.5 3013.0 3515.5 4018.2

19. SJSN Old-Age Savings Program: Impact of Rate of Return 19 Real Rate of Return Years of Contributions3% 4%5% 5 1.9 2.0 10 3.7 3.9 4.1 15 5.6 6.0 6.5 20 7.5 8.2 9.1 25 9.3 10.5 12.0 30 11.2 13.0 15.1 35 13.0 15.5 18.6 40 14.9 18.2 22.5

20. SJSN Old-Age Savings Program: Total Assets 20 Year% of GDP 55.2% 1010.1% 1514.4% 2018.0%

21. Conclusion 21 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