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Jakarta Post

Thanks, but not today

The salary cut would punish employees in the formal sector, as the government would add to their burden with more costs to bear, while potentially incentivizing people to stay in the informal sector.

Editorial board (The Jakarta Post)
Jakarta
Wed, September 18, 2024 Published on Sep. 17, 2024 Published on 2024-09-17T19:55:36+07:00

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Thanks, but not today Client service officers speak to participants of the Public Housing Savings (Tapera) program at the BP Tapera office in Jakarta in this file photo taken on May 30, 2024. (Antara/Bayu Pratama S)
Versi Bahasa Indonesia

M

ost people would be reluctant to have their salaries cut to feed into a state-sponsored program, especially at a time when everyone is concerned about weakening purchasing power.

Amid reports of the decline of the middle class in the country, the government has announced a mandatory pension program led by the Financial Services Authority (OJK) that would require employees to set aside a portion of their salary for an additional third-party pension fund on top of monthly obligations they already pay to the Workers Social Security Agency (BPJS Ketenagakerjaan).

There is a silver lining to the move, as it will help workers better prepare for retirement. Under the current system, retired Indonesians have to live on about 20 percent of their annual working income, far below the International Labor Organization's (ILO) recommendation of 40 percent.

However, the government should consider putting the program on hold and maintain any participation as optional.

This is partly because the only appropriate target for these programs are likely to be employees in the formal sector, whose income is easily measured and tracked due to their existing compliance with taxation and the BPJS.

The salary cut would punish employees in the formal sector, as the government would add to their burden with more costs to bear, while potentially incentivizing people to stay in the informal sector in order to avoid these kinds of obligations.

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This could complicate the government's efforts to reverse the worrying trend that nearly 60 percent of the Indonesian workforce is employed in the informal sector, according to Statistics Indonesia data this February.

The OJK and other relevant institutions are still working on the details of implementing the program, but we know that there will be a certain income threshold whereby employees earning at least that minimum parameter will have to participate.

For employees earning around the minimum wage of about Rp 5 million (US$326) a month, this would prove burdensome, as many live from hand to mouth with little access to social safety nets, which are only available for those truly living below the poverty line of over Rp 580,000 in monthly spending.

In developed countries, such mandatory pension schemes are accompanied by sufficient social safety nets that also cover certain sections of the middle-class population.

Moreover, Indonesian pension schemes, including the BPJS, require employers to bear a certain percentage of the monthly contribution alongside their employees.

While some established and prominent companies already take this into account, other businesses will have to prepare to set aside more company funds, which could translate into higher operational costs.

It would be prudent to anticipate potential risks, including the possibility of employee demands for additional remuneration to offset the impact of salary reductions associated with the program.

In addition, the government is poised to implement another analogous monthly contribution obligation in the forthcoming years, designated as Tapera. This policy requires employees to allocate a specified percentage of their monthly income for the purpose of home ownership, with employers similarly obliged to contribute.

Moreover, participation in a pension fund is not a straightforward undertaking, as it still entails a degree of risk.

As participants, employees must continue to oversee the investment decisions made by pension fund entities regarding the cultivation of their assets within the company. This includes monitoring the allocation of significant portions of these assets, such as those invested in stocks, which could potentially constitute up to half of the total value.

In the wake of market volatility during COVID-19, many Indonesians were unaware of these risks and were unable to accept the losses incurred when the stock market plunged, leading to distrust in these schemes. Furthermore, numerous high-profile cases of financial malfeasance and mismanagement of pension funds have emerged in recent years, yet the OJK has yet to provide satisfactory resolutions.

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