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PENSION IMPLEMENTATION IN THE CONTEXT OF LAW ON NATIONAL SOCIAL SECURITY SYSTEM: A MATHEMATICAL APPROACH Bambang Purwoko Member of National Social Security Council Experts Meeting of the ILO Le Meridien Jakarta, 12-15 December 2011 1

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PENSION IMPLEMENTATION IN THE

CONTEXT OF LAW ON NATIONAL SOCIAL SECURITY SYSTEM: A MATHEMATICAL APPROACH

Bambang Purwoko Member of National Social Security Council Experts Meeting of the ILO Le Meridien–Jakarta, 12-15 December 2011

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CONTENTS

  • 1. The background of pension under NSSS

3

  • 2. The information on a variety of pension benefits,

5

  • 3. The method,

8

  • 4. The duration of paying benefit and deficit
  • peration of social pension,

11

  • 5. Conclusion,

14

  • 6. Selected bibliography,

15

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  • 1. BACKGROUND
  • a. Articles 39-41 of Law No 40 of 2004 on NSSS
  • a1. Pension under NSSS Law as social pension (SP) shall be implemented

nationally on a social insurance principle or compulsory saving.

  • a2. Social pension in this Law is as defined benefit plan (DBP) that means

the benefit size shall be determined first regardless of whether the rate

  • f contribution is sufficient or not.
  • a3. The participant in SP is an employee or a worker who has paid the

pension contribution.

  • a4. Pension benefit is as benefit in cash received monthly by the retired

including: (i) old age pension, (ii) disability pension, (iii) widow or widower pension, (iv) child pension until age 23 or married before age 23 and (v) parent pension until a certain period as regulated further by the government regulation.

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  • b. Eligibility to SP Benefit based on NSSS Law
  • b1. The eligibility to SP benefit is definitely at age 55, permanent disability

and the death of the breadwinner before age 55.

  • b2. The benefit shall be computed on the basis of length of service and

the final wage

  • b3. An employee or the heirs is entitled to monthly pension benefit until

death of the breadwinner provided that he or she has met the length of paying contribution to social security carrier for “at least 15 years”

  • b4. If an employee has reached age 55 but the length of paying

contribution is less than 15 years, so the pension benefit is paid in lump-sum.

  • b5. An employee suffering from permanent disability due to work injury is

entitled to pension benefit no matter of the length of paying contribution at less than 15 years.

  • b6. The rate of pension contribution shall be determined on a certain

percentage of employee wages.

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  • 2. THE INFORMATION ON A VARIETY OF PENSION BENEFITS
  • a. The size of SP benefit as a percentage of certain wages shall refer to

(i) An average minimum wage ranging from IDR 0.65-Rp 1.4 million, (ii) GDP per capita in 2010 at about IDR 1.7 million per month, (iii) The highest basic wage of civil servant at IDR 3.4 million.

  • b. A variety of the benefits shall be made different according to (i) a nominal

amount of minimum-maximum wages, (ii) the status of single or married employee and (iii) different length of paying contribution.

  • c. The following is the size of SP benefit in US, South Korea, Thailand, the

Philippines and Vietnam and list of foreign exchange rates as information prior to determine SP benefit under NSSS Law:

  • i. USD 1 = Dong 16.000
  • ii. USD 1 = IDR 8.600
  • iii. USD 1 = Won 1.000
  • iv. USD 1 = Peso 50
  • v. USD 1 = Baht 40
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  • d. A variety of monthly pension benefits (2009)
  • i. USA
  • Single

: USD 2323  (IDR 19.97 million)

  • Married

: USD 4065 (IDR 34.85 million)

  • Disabled single

: USD 2453 (IDR 21.09 million)

  • Disabled married

: USD 3679 (IDR 31.64 million)

  • ii. South Korea
  • Single

: Won 400,000  (IDR 3.44 million)

  • Married

: Won 640,000 (IDR 5.50 million)

  • Disabled single

: Won 600,000 (IDR 5.16 million)

  • Disabled married

: Won 960,000 (IDR 8.25 million) Source: US Social Security Administration (2009) Korea National Pension Institute (2009)

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  • iii. Thailand
  • Minimum benefit

: Baht 1,650 (IDR 354,000)

  • Maximal benefit

: Baht 15,000 (IDR 3,225,000)

  • iv. The Philippines
  • LPC < 10 years

: Peso 1,000 (IDR 172,000)

  • LPC < 20 years

: Peso 1,200 (IDR 206,400)

  • LPC < 30 years

: Peso 2,400 (IDR 412,800)

  • v. Vietnam
  • LPC < 15 years

: 45% wages

  • LPC < 30 years

: 75% wages Source: US Social Security Administration (2009)

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  • 3. THE METHOD
  • a. The benefit of DBP is a function of wage percentage to whether it is 33%
  • r 50% or 66% or 75% wage.
  • b. The imposition of the rate of SP contribution is based on ceiling wage

because of the compulsory pension.

  • c. NSSC decides to use the earning not tax object for the category of single

employee (ENTO) in place of wage for the computation of the rate of SP contribution, because minimum wages vary from provincial, district to municipality levels.

  • d. The amount of ENTO for the category of single employee is IDR 1.3

million per month (USD 151).

  • e. The ceiling wage which needs to be imposed on pension contribution is 8

x ENTO (8 x IDR 1.3 million) that is IDR 10.4 million (USD 1209).

  • f. Proposed rate of contribution is 7% wage where the employer contributes

4% and the employee shares 3% wages to social pension.

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  • g. The following is various benefits and the rates of contribution (see Purwoko,

2011):

  • g1. Pension benefit is determined simply as the proportion of wages which

varies from minimal proportion of 33% wages and maximal proportion

  • f 75% wages to pension benefits:

1/3 2/5 ½ 3/5 2/3 ¾ wage (33%) (40%) (50%) (60%) (67%) (75%)

  • g2. Pension contribution is a proportion of and or a certain percentage of

maximally 8 x ENTO: 1/15 1/12 1/10 1/8 1/5 ¼ Locked in (6.7%) (8.3%) (10%) (12,5%) (20%) (25%) SP Indonesia The Phil Brunei Vietnam Malaysia Singapore 7% ENTO Thailand

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  • g3. Theoretically, the size of pension benefit depends on the following

qualifications: (i) Length of paying contribution at least 20 years (ii) Quality of employee earning at above minimum wage (iii) Sufficient rate of contribution at least 10% wage (iv) Application of pension factor at least 2% (v) Low inflation rate at less than 3% p.a. (vii) Accurate rate of actuarial interest as related to actuarial liability. (viii) Moderate rate of investment return by social security carrier.

  • g4. According to Prof. Zvi Bodie (1996) regarding pension management, in
  • perating DBP the employer shall bear the risk in term of past service

liability (PSL) to happen.

  • g5. For social pension, the government shall bear the risk in term of the

ageing problem including deficit payment by the social security carrier to happen not because of mismanagement of the carrier. Accordingly, the government shall prepare the contingency fund for the solution to the ageing problem and deficit payment.

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  • 4. DURATION OF PAYING BENEFITS AND DEFICIT OPERATION
  • a. For the illustration

Assumed that a. Monthly wage : IDR 1 million (constant)

  • b. Length of paying contribution : 15 years
  • c. Government bond interest : 8.5% p.a.
  • d. The size of pension benefit : 33% wage
  • e. Rate of contribution

: 7% ENTO

  • e. Average life after age 55 : 15 years

The size of annual pension benefit: 0.33 x ID 1 million x 12 = IDR 3,960,000 (USD 460.5) If the retired may live longer at 15 years, so the social security carrier shall provide a sum of money for (15 x IDR 3.96 million) IDR 59.4 million. The rate of contribution 7% ENTO to SP is IDR 70 thousand and or total annual contributions IDR 840 thousand. If the pension account for 15 years paying contribution plus investment return at 8.5% accrued is IDR 28.2 million, so the duration of paying benefit is about 6 years (see Table 1).

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No (1) Length

  • f

paying contribu

  • tion

(year) (2) Compound interest factor of 6,5% (year) (3) Annual pension contribu- tion (Rp 000) (4) Accumulated pension con- tributions of 7% (APC) (Rp 000) (5) = (3)(4) Annual pension benefit (Rp 000) (6) Duration

  • f benefit

to spend (year) (7)=(5)/(6) 1 2 3 4 5 15 20 25 30 35 28.2 48.4 78.6 135.9 192.7 840 840 840 840 840 23,688 40,656 66,024 114,156 161,868 3,960 3,960 3,960 3,960 3,960 5.98 10.27 16.67 28.82 40.87 Source: Author (2011) TABLE 1. CORRELATION OF LENGTH OF PAYING CONTRIBUTION AS 7% ENTO AND DURATION OF BENEFIT TO BE SPENT

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  • b. Deficit operation of social pension
  • b1. The contributions (c): 7%, 10% and 15% respectively,
  • b2. Length of paying contribution (LPC): 15 years in order for employees

to be eligible to pension benefit

  • b3. Interest earning as investment income of SP: 8.5% p.a. and
  • b4. Pension factor (Pf): 2%

Please calculate (a) the contribution account, (b) total pension benefits if length of survival after pension age is 15 years (LS) and (c) deficit financing of the plan. The response is as follows: Compounding interest factor of 8.5% for 15 years (CIF) = 28.2 Contribution accounts Total pension benefits Deficit (a) (b) (c)=(a)-(b) (c) (CIF) Pf (LPC) (PS)

  • i. 0.07 x 28.2 = 1.97

0.02 x 15 x 15 = 4.5 2.53 ii 0.10 x 28.2 = 2.82 The same as above 1.68

  • iii. 0.15 x 28.2 = 4.23

The same as above 0.27

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  • 5. CONCLUSION
  • a. Definitely, the implementation of social defined benefit pension is subject

to systemic risk for the social security carrier 2 (BPJS 2), that is ageing problem causing deficit operation to happen in the long run.

  • b. Due to the probable deficit operation in the long run, the government shall

prepare the fund contingency for the cover of deficit operation. According to Law No 24 of 2011 on BPJS, the government shall take over the financing of social security in case of financial crisis to happen.

  • c. The real problems to be faced by BPJS 2 responsible to operate pension:
  • Low earning of USD 2 per day totaling 55% of the population,
  • 70% of the labor force were employed in the informal economy,
  • 70% of the formal sector employee earnings were similar with

minimum wage and problem of transformation to the formal sector,

  • The application of outsourced work for the term 2 years which may

be renewed three times maximally according to the Labor Law,

  • Limitation on the government budget both for the provision of the

contingency fund and implementation of law enforcement.

  • d. Finally, SP shall be operated by BPJS in stages that we better start from

smallest one, that is small is beautiful.

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  • 6. SELECTED BIBLIOGRAPHY

________Law No 13 of 2013 on Manpower and Industrial Relations ________Law No 40 of 2004 on National Social Security System ________US Social Security Administration (2009) Washington D.C. ________Korea Pension Institute (2009) ________Asean economic indicators of 2010 Bodie, Zvi, (1996), “Defined benefit versus defined contribution”, Boston University - USA, Purwoko, Bambang, (2011), “Sistem proteksi sosial dalam dimensi ekonomi”, Penerbit Oxford Graventa Indonesia ISBN 978- 979-1380-08-9. Bp 10-12 December 2011

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terima kasih

In order for all of us not to be old to be poor the operation of social pension shall begin in 2015