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COPYRIGHT 2006 Institute of Southeast Asian Studies (ISEAS)
I. Introduction
On 28 September 2004, the Indonesian House of Representatives (Dewan Perwakilan Rakyat, or DPR) endorsed the law on the National Social Security System (Undang-Undang Sistem Jaminan Sosial Nasional, or SJSN). The law became a public law (Law No. 40/2004) on 19 October 2004, after outgoing President Megawati Soekarnoputri signed it. A task force appointed through the Vice-President's Office, first created by the Presidential Decree (Kepres) No. 22/2002, drafted the law. The members of the task force were representatives of sectoral ministries concerned with social security provision in Indonesia, such as the Ministries of Social Welfare (Kesra), Manpower, Health, Social Affairs, Economic Affairs (Ekuin), Finance, and Development Planning (Bappenas). No representatives from stakeholders such as employers' associations and labour unions were included in the drafting team.
The key feature of the new law is that it mandates the creation of several social security schemes for citizens: old-age pension, old-age savings, national health insurance, work injury insurance, and death benefits for survivors of deceased workers. The schemes would be financed by a payroll tax imposed on workers' wages, collected equally from employers and workers, mostly in the formal sector.
The passage of Law No. 40/2004 means that the existing social security programmes in Indonesia would be expanded to cover not only civil servants (Taspen and Askes schemes) and private formal sector workers (Jaminan Sosial Tenaga Kerja, or Jamsostek), but would eventually cover all Indonesian citizens, particularly those who are working in the informal economy. Indeed, the law mandates that within the next two to three decades social security coverage in Indonesia should be expanded to the informal sector, the unemployed, and the poor.
While it is assumed that many parties would welcome the coverage of social security benefits, such as pension, health, and work injury insurance, the passage of Law No. 40/2004 was opposed by many stakeholders who are directly involved with the issue of social security provision--including employers' associations, labour unions, pension and healthcare companies, and independent economists. This is because, as would be elaborated further in this paper, the new law contains several serious flaws that would make its implementation problematic. It is being made contrary to the consensus among social security experts and policy-makers. In addition, the law does not take into account the traditional family support system that has been the main provider of old-age income security for most elderly Indonesians today.
The remainder of this paper is divided into the following sections. Section II describes the current social security arrangements available for Indonesians today, both through traditional support and through formal channels (mainly the government). Section III describes major provisions of the social security law in detail. Specifically, the paper takes a closer look at the retirement benefit provisions under the new law. (1) Section IV is a critical analysis of these provisions. It explains why the retirement benefit provisions would endanger the welfare of most Indonesian workers instead of improving their welfare, and how it would create serious problems to the Indonesian economy. Section V contains policy recommendations aimed at reforming the newly enacted law so that it would be in line with the existing consensus on social security policy based on international experience. Section VI concludes the paper.
II. Current Social Security Arrangements in Indonesia
For more than three decades, Indonesia has made significant progress in its economic and human development. This has resulted in better health conditions for Indonesians and longer life expectancy. The country's life expectancy has increased dramatically during the last three decades, from 45 in 1970 to 66 in 2004 (UNDP 2003). Consequently, the number of Indonesians aged 60 years and above has increased from 4.48 per cent of the population in 1971 to 7.97 per cent in 2000 (ADB 2004, p. 47).
During the past three decades, Indonesia has also successfully implemented the family planning (keluarga berencana) programme, which has reduced the number of children born into typical Indonesian families. While in the early 1950s the average Indonesian family consisted of six children and their parents, in the 1990s the typical Indonesian family consisted of approximately 2.5 children and their parents (United Nations 1999). At the same time that birth rate has declined, the number of older Indonesians has increased at a rapid rate. It is estimated that by 2020, about 11.34 per cent of the population will comprise of elderly Indonesians over 60 years old (ADB 2004, p. 47). This trend will continue for the forseeable future. It is estimated that in the year 2050, about one-third of all Indonesians will be 55 years old or older and nearly one-fifth will be 65 years or older (U.S. Census Bureau 2004).
It is estimated that currently about half of all Indonesia's elderly are still active in the labour force, mostly in the informal and agriculture sectors (Koesoebijono and Sarwono 2003, p. 391). However, most of these elderly have difficulty in supporting themselves, with an average income of Rp500,000 (about US$55) per annum in 1999 (Hatmadji, Mundiharno, and Pardede 1999, p. 48). Because of their lack of earnings, a large number of them (about 45 per cent) have to rely on family support, while 31.5 per cent are self-employed. Their only asset is often their house or land (Hatmadji and Pardede 1999).
The rapid ageing of Indonesia's population within the next two to three decades will no doubt create various public policy implications for the country. There will be a greater demand for old-age income support schemes as more Indonesians are getting older, and eventually as their health deteriorates, they will have to leave the labour force. The increased number of the elderly in the country's population will also result in an increased demand for medical care and services for this sector of the population. As a result, health expenditure as a percentage of the gross national product (GNP) could be expected to increase as well.
Historically, old-age policy has not been a major priority for the Indonesian Government, due to the fact that the number of elderly Indonesians (60 years and above) only formed a small percentage of Indonesia's population. Responsibility for the care of the elderly largely fell on their families, since it was assumed that productive citizens would take care of their aged and in firmed parents. Very little government resources were allocated to assist elderly Indonesians, especially those who are poor and/or have no immediate family members to assist them.
In the past, most elderly Indonesians could rely on the extended support of their families, both as caregivers during the onset of health problems and also as providers of supplemental financial support. Unfortunately, the rapid ageing of Indonesia's population is occurring at about the same time the country is undergoing rapid modernization and recovering from the impact of the 1997/98 Asian financial crisis.
Modernization has brought many changes that affect the family support system in Indonesia. The national family planning programme has succeeded in significantly reducing Indonesia's birth rate. While this policy has resulted in reduced family expenditure for the support of children, it also means that elderly Indonesians will be supported by fewer children when they enter old age. This, of course, could reduce the amount of support they will receive from their children in old age.
Among other changes in the family brought about by modernization is the increased likelihood that younger family members who are still in the labour force migrating to other cities or countries, where it is perceived to offer more job opportunities. While they might be able to earn more in the other city or country, younger family members will be living further away from their elderly parents. As a result, the likelihood of children fulfilling their traditional role as their parents' caregivers in times of need is reduced (Hugo 1996, p. 17).
Consequently, support for elderly lndonesians is increasingly shifting from personal care, in which the elderly receive direct emotional and physical care from their own children or family members, to a more impersonal and financially oriented system, in which assistance is given in the form of cash or through hired assistants such as nurses and domestic help (Koesoebijono and Sarwono 2003, p. 394). Thus, while some elderly Indonesians might enjoy adequate financial support, they lack the personal care and attention that could only be provided by family members.
As a result of these shortcomings, the Indonesian elderly increasingly have to turn to third-party institutions for their care. These services could come from the government or the private sector, both profit and non-profit organizations, such as nursing homes, hospitals and clinics. However, resources provided by these institutions are limited. Only about 10 per cent of Indonesians (workers and their spouses) have some form of pension coverage, (2) while only 15 per cent of Indonesians are currently covered by some form of health insurance scheme provided by either the public or the private sector (3) (ILO 2003). In addition, it is virtually impossible for those aged 65 years and above to receive health insurance coverage, even though this age group is more vulnerable to serious medical problems (ILO 2003, p. 193). Finally, social assistance spending for elderly Indonesians still receives a low priority in the government's budget. In the 2004 state budget, the government only allocated Rp21.5 billion (US$236,000) for such services (ADB 2004, p. 99), an amount that is far from sufficient in meeting the needs of elderly Indonesians.
The remainder of this section will describe the government-run social...
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