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). …