Fully Funded Defined Contribution Pension System: Role in Old-age Financial Adequacy using Illustration from Indonesia

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

Abstract

The ageing population has become a new demographic trend in not only developed but also developing countries. Many governments may feel threatened by the challenge of state budget sustainability due to the rising number of retirees. Therefore, they consider shifting the responsibility of providing old-age financial adequacy from the state to the individuals themselves. Indonesia is not an exception. Yet, in developing countries such as Indonesia, retirement is not necessarily a cause for celebration. It may mean living in poverty. There are three issues concerning the shift. The first is whether the shift improves the pension payout. The second is whether the shift guarantees the absence of old-age poverty. The third is whether retirees can retain their preretirement standard of living. This chapter illustrates the discussion with an Indonesian case involving its civil servants’ pension system. The government of Indonesia is currently considering a shift from the existing defined benefit PAYG system to a fully funded defined contribution pension system. It concludes that the shift improves the payout. However, it does not guarantee that retirees will live above poverty lines if they rely only on the pension payout. Furthermore, retirees are likely to experience a lower living standard except when the remaining retirement fund is re-invested during the retirement period. It recommends that the fully funded defined contribution system be used as a complement, not a substitute, to the PAYG defined benefit system.
Original languageEnglish
Title of host publicationHandbook of Aging, Health, and Public Policy.
PublisherSpringer, Singapore
Pages1–22
ISBN (Print)978-981-16-1914-4
Publication statusPublished - 10 Apr 2023

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