A trade-off between old-age financial adequacy and state budget sustainability: Searching a government optimum solution to the pension system in Indonesia

Figures & data

Figure 1. State budget for pension benefit and Indonesia pension index.

Source: Nota Keuangan dan APBN Indonesia 2009–2020 and Melbourne Mercer Global Pension Index 2009–2020.

Table 1. Issues in World Bank’s five pillars

No	Pension scheme/ multi pillar	Issues
		Adequacy/Affordability	State financial sustainability
1.	Basic Needs Security/Zero Pillar	Provide security for the poor groups to live at a subsistence level	Potentially create fiscal burden as the number of older people rises
2.	PAYG/Defined Benefit/First Pillar -mandatory	Provide security for retirees to have a certain amount of financial adequacy in their retirement life	Potentially create fiscal burden with a rising number of older people and decreasing number of working people, assuming no increase in labour productivity
3.	Defined Contribution/Fully Funded/Second Pillar-mandatory	Not everybody is able to pay the contribution	Guarantee sustainability of the state budget
4.	Individual Savings/ Third Pillar -voluntary	Not everybody has sufficient income to save	Guarantee sustainability of the state budget
5.	Family Support/The Fourth Pillar -voluntary	How much the family must support; is the family rich enough to serve the support? Who should take the responsibility of taking care of older people?	Reduce state financial responsibility to take care of older people.

Source: Synthesized by the authors from the two World Bank publications (Holzmann & Hinz, 2005; Holzmann et al., 2008).

Table 2. A simulation for universal pension system

	Tw	nw	Tnw	nnw2	(Tw x nw)+(Tnw x nnw2)	1 + r	t1	(1 + r)^t1	nnw1	(Tnw x nnw1)	Budget
Tw = 2Tnw	722,534	10,924,824	361,267	38,315	7,907,398,729,121	1.059	40	9.71929	3,493,275	1,262,004,979,425	2,075,582,882,115
Tw = 3Tnw	1,083,801	10,924,824	361,267	38,315	11,854,177,121,129	1.059	40	9.71929	3,493,275	1,262,004,979,425	2,481,659,747,156
Tw = 4Tnw	1,445,068	10,924,824	361,267	38,315	15,800,955,513,137	1.059	40	9.71929	3,493,275	1,262,004,979,425	2,887,736,612,197
Tw = 5Tnw	1,806,335	10,924,824	361,267	38,315	19,747,733,905,145	1.059	40	9.71929	3,493,275	1,262,004,979,425	3,293,813,477,238
Tw = 6Tnw	2,167,602	10,924,824	361,267	38,315	23,694,512,297,153	1.059	40	9.71929	3,493,275	1,262,004,979,425	3,699,890,342,279
Tw = 7Tnw	2,528,869	10,924,824	361,267	38,315	27,641,290,689,161	1.059	40	9.71929	3,493,275	1,262,004,979,425	4,105,967,207,320
Tw = 8Tnw	2,890,136	10,924,824	361,267	38,315	31,588,069,081,169	1.059	40	9.71929	3,493,275	1,262,004,979,425	4,512,044,072,361
Tw = 9Tnw	3,251,403	10,924,824	361,267	38,315	35,534,847,473,177	1.059	40	9.71929	3,493,275	1,262,004,979,425	4,918,120,937,402
Tw = 10Tnw	3,612,670	10,924,824	361,267	38,315	39,481,625,865,185	1.059	40	9.71929	3,493,275	1,262,004,979,425	5,324,197,802,443

Source: Calculated by authors.

Government of Indonesia. (2009-2020). Nota Keuangan Pemerintah dan APBN (NK). In annual official financial and development program. Ministry of Finance of Indonesia.

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Holzmann, R., & Hinz, R. (2005). Old age income support in the 21st. The World Bank. Century.

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Holzmann, R., Hinz, R., & Dorfman, M. (2008). Pension systems and reforms conceptual framework. The World Bank.

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