Pension plan in Indonesia: Avenues for reform

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Abstract

Two decades ago, the pension system in Indonesia was basically enjoyed by civil servants. Only after the enactment of Law No 11 1992, pension funds apply for every employee, public or private. There are two types of pension funds, Employers' Sponsored Pension Funds (Dana Pensiun Pencari Kerja or DPPK) and Financial Institution Pension Funds (Dana Pensiun Lembaga Keuangan or DPLK). DPPK could be defined as contribution or denned benefits, and DPLK is defined contribution. The Indonesian pension plan is, in general, the defined contribution plan for mostly young employees. Most of them are partly funded and the participation of employers is relatively limited. However, the public awareness of pension plan is still low due to the strong family relationship and resistance of most private companies to adopt the plan. As a result, the voluntary plan dominates the pension plan development while the economic condition is not good enough to enforce the mandatory privately or publicly managed plan. The current system does not do much to redistribute income but maintain the intergenerational fairness. Current employees tend to delay their real retirement by looking for new jobs both in formal and informal sectors. Their expected income is still considered higher than the possible pension benefits. Although the pension plan is not yet a big issue, the possible political intervention is very high due to quick capital accumulation and prospective political attractiveness. The public pension plan, however, is a long way to go due to the current economic crisis and fiscal distress. Although the 1992 pension plan law is praised as a significant step for Indonesian pension plan industry, there are more reforms needed to make the pension plan common words in every Indonesian household. More incentives are needed to attract new players in the industry, while at the same time law enforcement has to be the priority in order to make the compulsory pension plan working. The opportunity to develop a pension fund system in Indonesia is very widely open since the current participants are only about 5.7 million people, i.e. 6.6% of Indonesian labor force.

Original languageEnglish
Pages (from-to)151-161
Number of pages11
JournalHitotsubashi Journal of Economics
Volume43
Issue number2
Publication statusPublished - Dec 2002

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