Social Protection System Review of Indonesia

Assessment and recommendations

Indonesia’s recovery from the Asian Financial Crisis and the economic, political and social upheaval it caused has led to an impressive reduction in poverty and a significant improvement in living standards. However, the growing prosperity has not been shared by the entire population; inequality has risen strongly over the past two decades. The Government of Indonesia (GoI) has recognised this uneven development as a key constraint on its ambition to become one of the world’s ten largest economies and it has placed social protection at the centre of its inclusive growth strategy.

The GoI is committed to establishing a social protection system that provides comprehensive coverage for the entire population and achieves coherence and co-ordination between the various institutions involved in social protection. Such a system will be able to address a number of structural challenges, including a last-mile problem confronting strategies to reduce poverty, extensive vulnerability among individuals who have emerged from poverty but have not yet joined the middle class, and long-term demographic change, particularly population ageing.

This report identifies mechanisms for strengthening the social protection system. It is intended for social protection stakeholders both within Indonesia and outside. Amid increasing global emphasis on establishing social protection systems, Indonesia’s policy response to rising inequality, disparities in territorial development, demographic change and information challenges can make a significant contribution to best practice in social protection internationally.

Indonesia’s economic development has not benefited the entire population

Indonesia faces a last-mile problem. The national poverty rate fell from 24.2% in 1998 (at the height of the Asian Financial Crisis) to 9.7% in 2018. However, the decline slowed significantly after 2010. Meanwhile, inequality has increased: the Gini coefficient increased from 0.30 points in 2004 to 0.41 points in 2014, one of the fastest increases in the region. It started to decline in 2017, falling to 0.38 in September 2018.

Poverty is concentrated among children and the elderly, with women more likely to be poor than men at almost all ages. The GoI classifies almost two-fifths of the population as poor or vulnerable, although the proportion fell from 42.6% to 38.2% between 2011 and 2016. There has been considerable movement of individuals between income levels and in and out of poverty over the past decade.

Poverty also has a clear spatial dimension. The five poorest provinces are in the east, and their poverty rates in 2016 were, on average, 18 percentage points higher than the average for the five least-poor provinces. Rural areas are significantly poorer than urban areas. In order to address these disparities, a recent reform to the Village Funds has resulted in villages across the entire country receiving a large increase in funding from the central government and gaining significantly greater autonomy. Concerns as to the extent to which the Village Funds are achieving sustainable declines in poverty have prompted the GoI both to revise the formula by which the size of the transfers to different villages is determined and to emphasise the importance of the allocations being used to build basic infrastructure and for the economic empowerment of disadvantaged groups.

Indonesians face a range of risks along the life cycle despite a marked improvement in many human development indicators since 2000. Maternal and infant mortality have fallen significantly, although they remain high by regional standards. However, stunting remains a major problem: in 2013, 37.2% of children under age 5 suffered from stunting, up from 36.8% in 2007. Enrolment in early childhood education and learning facilities has improved but the majority of children still do not access these services.

Children from poor and vulnerable households are far less likely to benefit from improvements in public services than their wealthier peers, meaning they are deprived during a crucial period of cognitive and physical development. There are also major regional disparities: only 40.4% of children Aceh and Papua under age 5 are fully immunised, for example. The long-term consequences for inter-generational transmission of poverty and the development of Indonesia’s human capital are grave, especially in a context where the country’s demographics are becoming less favourable.

Indonesia has experienced a rapid demographic transition. Birth rates increased rapidly following independence in 1945, resulting in a baby boom evident in the size of today’s working-age population. With birth rates subsequently declining, Indonesia has benefited from a demographic dividend, with a large economically active population supporting a relatively small number of young or old dependants. Over the coming decades, today’s working-age individuals will reach old age, resulting in a rapid ageing of the population. From the mid 2020s onwards, the dependency ratio will begin a rapid ascent.

These trends require that Indonesia’s workforce becomes more productive. Education reforms since 2000 have significantly improved access to education at all age groups and financing for the sector is protected by a Constitutional requirement that it receive 20% of the budget. However, the quality of education has seen less improvement. A reform in 2016 increasing the duration of compulsory education from 9 to 12 years will expand access but it will also reduce the finances available per student for much-needed quality improvements. Productivity is also a function of the health of the workforce, meaning the public health system has an important role to play.

Some 23.2% of the youth (aged 15‑24) were not in education, employment or training (NEET) in 2016, a 6.4 percentage point decrease from 2008. The percentage of female youth NEET is considerably higher than for males, although the gap appears to be shrinking. This disparity between male and female labour outcomes persists across the working age: average labour force participation rates for men and women between 2000 and 2015 were 79.7% and 47.1% respectively, and there has been little evidence of convergence. The gender salary gap for full-time workers in 2014 exceeded 30%.

The national unemployment rate fell from 10.3% in 2006 to 5.3% in 2018. However, some 30% of workers are under-employed and many workers confront long working hours and low pay. Informal employment remains the norm for most workers, despite declining: between 2006 and 2016, the rate of informal workers (defined by Statistics Indonesia as own-account workers, temporary or casual employees and unpaid family workers) fell from 68.9% to 57.6%. Informality and poverty are closely correlated.

Individuals in informal employment (and their families) are unlikely to be covered by social protection, which in turn renders them more exposed to ill-health and other shocks. The GoI is making a particular effort to expand contributory arrangements into the informal sector. Informal workers often find themselves in the “missing middle” of social protection coverage, whereby they are ineligible for poverty-targeted social assistance but excluded from employment-based contributory arrangements.

Indonesia’s elderly population is relatively small but it is the age group most prone to poverty. In 2016, 14.7% of individuals over age 65 had incomes below the poverty line, versus 14.9% in 2010. The prevalence of informality means that less than 10% of the elderly receive a pension, with coverage among women especially low. As a consequence, they rely on family for income support rather than public social protection arrangements. Close to half the population aged 65 or over has some form of disability, making it very hard for them to remain economically active and support themselves.

Indonesia’s demographic and societal changes are accompanied by an epidemiological transition. Non-communicable diseases are becoming a more significant burden on health than communicable diseases (although there has been a notable increase in the prevalence of HIV/AIDS). The proportion of total deaths attributable to non-communicable diseases rose from 63% in 2010 to 77% in 2014. The proportion of the population that is obese more than doubled between 2007 and 2018, from 10.5% to 21.8% (Ministry of Health, 2018[1]). The high prevalence of smoking, especially among men, is also a major health concern.

The costs and accessibility of healthcare have a major impact on individuals’ response to ill health or injury. A majority of Indonesians suffering a health issue choose self-treatment instead of visiting health facilities or medical professionals, although this trend is decreasing: in 2014, 61% treated themselves, compared with 68.4% in 2009.

Around 8.6% of the population over the age of two have some type of disability and half (48.5%) report multiple disabilities. Rates are higher for females than for males and for rural residents than for urban residents. Individuals with disabilities face more risks and vulnerabilities than the general population, and access to social protection is extremely low, with about 1% of people with disabilities accessing the principal social assistance mechanism covering this risk.

Looking ahead, Indonesia’s economic prospects are positive, although labour productivity is a concern. The Fourth Industrial Revolution holds major potential for the Indonesian economy but could also be a threat if the workforce lacks the skills to harness it. Social protection will need to be part of the policy response as the GoI prepares for Industry 4.0. Climate change is also likely to have adverse consequences for the economy and the workforce over the longer term through its impact on the agricultural sector.

Social assistance has evolved rapidly and expanded recently

Indonesia’s recovery from the far-reaching economic, political and social consequences of the Asian Financial Crisis of 1997-98 is an international success story. Although recognised as a basic human right by Indonesia’s constitution, social protection was poorly developed prior to the Crisis but emerged as an important part of the response and has since played an ever-larger role in Indonesia’s development.

Three presidents have charted the evolution of social protection in Indonesia: Megawati Sukarnoputri (2001-04), Susilo Bambang Yudhoyono (2004-14) and Joko Widodo (2014-present). Their respective administrations took responsibility for scaling up social assistance and for reforming social insurance, although the degree of continuity between governments has varied.

Social assistance reforms have not occurred in a particularly strategic manner. Each administration has prioritised different programmes over others, experimenting with new programmes and rejecting or reforming programmes based on their impact. The development of social insurance has followed a more linear trajectory.

Over the past two decades, the GoI’s perception of social protection has evolved relatively swiftly. Having fulfilled a traditional relief-response function in the wake of the Asian Financial Crisis, it subsequently came to the fore as a mechanism for mitigating the impact of reductions in energy subsidies. Nowadays, the GoI recognises its importance from a longer-term developmental perspective. The National Medium-Term Development Plan (RPJMN) for 2015‑19 recognises social protection as being central to its objective of reducing inequality between income groups and between regions to achieve stronger economic growth and shared prosperity.

Social assistance consists of multiple programmes implemented by a number of different line ministries, including the Ministry of Social Affairs (MoSA), the Ministry of Education and Culture, the Ministry of Religious Affairs and the Ministry of Health. It encompasses programmes covering a wide variety of risks, from conditional cash transfers (CCTs) to food subsidies and student scholarships. However, eligibility for these programmes is determined by a single mechanism: the Unified Database (UDB), which has been developed since 2005 as a common targeting mechanism for social assistance.

The largest social assistance programmes are Rastra, which provides subsidised rice for the poor; Programme Indonesia Pintar (PIP, Assistance for Poor Students) and Program Keluarga Harapan (PKH). Rastra is being integrated with an electronic food voucher system, Bantuan Pangan Non Tunai (BPNT). The GoI (through the Ministry of Health) also fully subsidises the health insurance contributions of poor and vulnerable households. Beneficiary households are known as Penerima Bayaran Iuran (PBI) members of JKN.

This review analyses how these programmes differ significantly in terms of their coverage, cost and impact. All the programmes succeed in reducing poverty but the efficiency with which they do so varies widely. Rastra was accessed by 45% of the population in 2016, demonstrating significant errors of inclusion that dilute the efficiency with which it reduces poverty. PIP has scaled up significantly and currently covers around 20 million beneficiaries; it is more efficient than Rastra in eliminating poverty but there is still extensive leakage to the non-poor, which has been attributed to beneficiaries being selected by schools or local government rather than with reference to the UDB.

PBI has also scaled up strongly in recent years, covering 92.4 million beneficiaries in 2018 (102 million if local schemes are included). Although PBI has been criticised for its poor targeting performance (reflecting both errors of inclusion and exclusion) it is slightly more efficient at reducing poverty than Rastra. However, supply-side barriers prevent the programme from increasing access to health services among beneficiaries to the full extent.

PKH is shown to be the most effective programme at reducing poverty and is scaling up rapidly to cover more geographical areas and a larger portion of the poor population. Coverage has increased to 10 million households in 2018, up from 6 million in 2016, reflecting PKH’s effectiveness at reaching poor households. The benefit modalities are currently being revised by the GoI with a view to increasing benefit values and re-establishing variable benefit levels prior to a further expansion of coverage. The programme has been shown to have not only a short-term impact in reducing poverty but also longer-term benefits in human capital development, notably a reduction in stunting rates among beneficiaries.

An important point to bear in mind is that social assistance programmes are intended to be complementary. With eligibility underpinned by the UDB, individuals who access one programme should typically access the others, since each covers a particular risk. However, significant progress is required in this regard: in 2014 (before UDB was as widely used across social assistance programmes as it is today), less than 30% of families in the poorest decile that were receiving PKH also benefited from PIP and Rastra and were registered as PBI. This lack of coherence is a major constraint on the individual programmes’ capacity to achieve lasting reductions in poverty and inequality.

Tax-financed active labour market policies are an important mechanism for promoting the skills and productivity of poor and vulnerable workers. While such programmes exist in Indonesia, they are not implemented at a significant scale, although infrastructure projects financed by the Village Funds often employ poor and unemployed individuals, meaning they share some features with public works programmes.

The most important labour-market policies are minimum wages and severance pay. Both instruments are well established but risk being distortive. Severance pay is considered a constraint to hiring and firing workers while minimum wages are high relative to the median wage. Both instruments are poorly implemented: minimum wages often do not hold and only a small minority of workers receive full severance pay when they lose their jobs.

At present, Indonesia does not have an unemployment insurance arrangement. Combined with the uneven functioning of severance pay, this not only leaves workers vulnerable to a sharp reduction in welfare if they lose their job but also means that Indonesia lacks an effective counter-cyclical social protection mechanism.

Indonesia is making rapid progress towards universal health coverage but pension coverage remains low

In what has been described as a big bang approach to social insurance, two key pieces of social insurance legislation were passed within the space of a decade. The first, in 2004, created the policy framework for social insurance: the Sistem Jaminan Sosial Nasional (SJSN; National Social Security System). The second, in 2011 created the institutional framework by establishing the Badan Jaminan Sosial Nasional (BJPS; National Social Security Administering Body).

BJPS Kesehatan (henceforth BPJS Health), which began operations in January 2014, took effect was made responsible for Jaminan Kesehatan Nasional (JKN; Public Health Insurance with the aim of achieving universal health coverage. BPJS Ketenagakerjaan (henceforth BPJS Labour), which began operations in July 2015, is responsible for employment-related social security. The SJSN reforms recognised a need to establish a social insurance system with much greater coverage than previous arrangements had achieved. BPJS Health has been much more effective than BPJS Labour in this regard.

Since July 2015, BPJS Labour has implemented all social security programmes for employees and non-wage or informal workers. Before 2015, JAMSOSTEK administered benefits for private sector workers. TASPEN remains the administrator of benefits for civil servants while ASABRI administers those for armed forces personnel.

A new pension programme, the Jaminan Pensiun (JP), has been introduced as part of a broader reform of retirement arrangements. The JP is run on a defined benefit basis for formal-sector workers, funded by a contribution rate of 3% of salary, with a retirement age of 56 and a vesting period of 15 years. The retirement age and contribution rate will both rise gradually, with the latter expected to reach 8% (although no clear timetable exists). The JP is intended to sit alongside the existing provident fund (Jaminan Hari Tua, JHT), to which workers in the formal and informal sector alike are expected to contribute. Civil servants and other state employees are meant to transition to this new arrangement by 2029.

Some 30 million workers were active members of BPJS Labour at the end of 2018. Coverage outside formal enterprises remains very low. Efforts to attract informal workers to enrol by offering low contribution rates are hampered by the stipulation that they must also contribute to employment injury insurance. Some form of contribution subsidy might be required to address this issue, and it is a concern that current social assistance arrangements for the elderly are so small, leaving large groups of elderly (particularly women) without any formal income support.

Low coverage levels of the JP might have implications for the long-term solvency of the fund, as would a failure to increase the contribution rate or increase the retirement age. Achieving a balance between these parameters will be critical. The integration of the public sector is likely to be difficult if the programme is not well established and solvent.

BPJS Health has expanded coverage of JKN, the national health insurance system, at a much faster rate. In 2011, the GoI targeted achieving universal health coverage (UHC) by 2019. As of October 2018, it covered 205.1 million individuals (78% of the population), up from 111.6 million in January 2014. However, the effective usage of JKN enrolees is a concern, with not all of them accessing the medical services to which they should be entitled, a consequence of a range of supply- and demand-side barriers.

Its success has important lessons for BPJS Labour regarding contributions mechanisms. A high proportion of those covered by JKN are subsidised by the GoI, partly or in-full according to income. It also underlines a failure to co-ordinate between the two agencies, such as that increased enrolment in JKN generates greater coverage of BPJS Labour.

There are two main categories of JKN enrolee: PBI and non-PBI (contributory). Non-PBI members comprise various sub-categories, whose premiums reflect differing capacity to contribute. These include workers in the informal sector, who can choose between three different premium levels entitling them to different levels of service. A missing middle of JKN coverage has been identified, with only 52% of individuals aged 20 to 35 years in the middle-income groups enrolled.

Notwithstanding the overall progress towards UHC, high enrolment brings financial challenges. The flexibility for informal workers to make irregular contributions is resulting in individuals gaming the system by registering when they (or their household) have a health problem. The majority of informal workers also opt for the lowest premium. The overall effect has been to drive the claims ratio above 100%, which in turn is driving a sharp increase in JKN’s deficit. Unless these structural issues are addressed, JKN risks becoming an ever-larger strain on public finances as coverage grows.

Social protection spending is constrained by low domestic resource mobilisation

Social assistance spending has risen significantly in absolute terms since 2012 but, at 0.7% of GDP in 2016, is low for a country at Indonesia’s income level. Low allocations on social assistance reduce its capacity to reduce poverty and inequality, especially when divided across a large number of institutions. This heightens the need to improve coherence between programmes and improve targeting. Social insurance spending has typically been larger than social assistance but the gap has shrunk significantly in recent years. According to World Bank calculations, social insurance expenditure was IDR 99.6 trillion in 2016, versus IDR 78.3 trillion on social assistance.

Total social protection spending was 1.4% of GDP in 2016, up from 1% of GDP in 2007. However, it is notable that social protection spending was 15.4% of total central spending in 2016, up from 10.7% in 2012, underlining that social protection is growing as a budgetary priority. In 2019, increases in PKH benefits and PBI spending are expected to be a major driver of overall public expenditure.

Indonesia’s Achilles Heel is its low level of domestic resource mobilisation. In 2016, the tax-to-GDP ratio was 11.6%, one of the lowest in the region and a major constraint on the country’s fiscal capacity, in particular its redistributive potential. Reductions in energy subsidies have enabled an expansion of social assistance, although not all the fiscal space created by these structural reforms has been absorbed by social assistance. Social protection faces competition from a number of other priority areas of public spending, including infrastructure; higher tax revenues are critical if social protection is to grow significantly.

Efforts to increase social insurance coverage can ease the direct burden on public finances. However, they must work in tandem with policies to increase tax revenues through broader formalisation policies. If these function coherently, a virtuous circle is achievable whereby a larger proportion of the population is formally employed and contributing to social security arrangements at the same time as paying more in taxes, with the consequence that workers’ livelihoods are protected and the government can afford to spend more on tax-financed social protection for individuals who are unable to work. Of course, taxes and social security contributions can also militate against formalisation by increasing the cost of employment; careful policy design and implementation is critical.

At the same time, it is important that higher taxation does not have an adverse impact on the poor. Fiscal incidence analysis of the major direct transfer programmes in this report indicates that the combined impact of taxes and transfers is to reduce income inequality but increase poverty, although the impact on poverty is reversed when other social spending is included, particularly subsidies and in-kind health and education benefits.

A systems approach is reducing fragmentation of social protection

Social protection is characterised by extensive fragmentation. Roles and responsibilities are divided across various line ministries and administrative bodies, without one central co-ordinating body. Indonesia has made progress towards developing the information infrastructure to underpin a social protection system through the development of the UDB, a single targeting mechanism for social assistance programmes. However, this is not used by all stakeholders in the social protection system. To improve its targeting performance and build greater confidence in the UDB, it is necessary to strengthen updating and verification mechanisms. Recent progress in developing single-window services and on-demand application should be maintained to reduce exclusion errors.

Indonesia does not have an integrated management information system, although MoSA is currently developing one for PKH. The absence of an MIS constrains the GoI’s capacity to monitor and evaluate the functioning of social assistance programmes and to ensure that beneficiaries are receiving all the benefits to which they are eligible. The rapid scale-up of certain social protection programmes in recent years has magnified the challenge of establishing and maintaining information systems.

Under the decentralised system of government, central and sub-national government in Indonesia share responsibility for social protection provision. Sub-national governments can implement their own social protection programmes, although few do. Co-ordination in social protection provision across different levels of government is inadequate, and the flows of information and resources between them uneven. As a result, national programmes might not receive the buy-in they need from sub-national government and the implementation of centrally-led reforms might differ from what was intended. This makes it difficult to establish a national system of social protection and raises the importance of the Ministry of Home Affairs as the link between national and sub-national government.

Social workers, known as facilitators in Indonesia, have a critical role to play in the social protection system. However, this role has in the past not been universally recognised and there are shortcomings in the training social workers receive. Progress has been made towards addressing these challenges but the potential of social workers to support the implementation of a social protection system is under-utilised.

Ensuring that the 23 million children currently on the UDB access the full range of social assistance programmes to which they are eligible is critical for improving their developmental outcomes and reducing poverty. Merging PIP with PKH might reduce gaps in coverage amongst this group while ensuring that a higher proportion of social assistance expenditure reaches the intended beneficiaries. In so doing, it would enable beneficiaries to graduate from PKH sooner.

As the population ages, demand for improved social protection for the elderly is likely to intensify. In a context of slow increases in coverage of contributory social insurance arrangements, particularly among women, a clear strategy for social assistance for the elderly should be developed.

The policy response to ensuring higher pension coverage amongst the missing middle might also include dual approaches to enrolling own-account workers and those in small and medium-sized enterprises respectively. Increasing social insurance coverage (and enhancing formalisation) will also require a broader restructuring of employment legislation, in particular severance pay. At the same time, the policy response to population ageing should extend beyond income replacement and consider the broader welfare needs of elderly individuals.

The political context for social protection in Indonesia – and therefore for the reforms proposed in this review – appears highly favourable. Strong political commitment at the presidential level is reflected in policy frameworks, and this is likely to continue with the RJPMN being developed for the period 2020-24. This lessens social protection’s vulnerability to the electoral cycle.

At the same time, there is strong commitment from the international community to support the development of social protection in Indonesia. This is reflected by a recent World Bank loan to support the development of systems that will underpin the scale-up of PKH as well as by the many other institutions supporting Indonesia to develop the architecture for a social protection system. Indonesia’s rapid progress towards UHC is generating strong interest amongst donors and other developing countries, making Indonesia a champion both in this area and in the global push towards universal social protection.

Recommendations

Consolidate child grants and strengthen social assistance for the elderly to address the last-mile problem (short-to-long term)

• Complete the scaling-up of the PKH, ensuring that households covered by the intervention belong to the target group.

• Ensure PKH benefits keep pace with inflation to maintain purchasing power.

• Integrate PIP with PKH to improve social assistance coverage amongst children in the UDB.

• Gradually scale up social assistance for the elderly.

Strengthen the information architecture for social protection (short-to-medium term)

• Continue to develop and co-ordinate mechanisms for updating and verification of the UDB.

• Institutionalise capacity within Ministry of Social Affairs to maintain the UDB in collaboration with other institutions involved in its development.

• Include vulnerable populations in disaster-prone regions within UDB to facilitate adaptive social protection programmes and integration of social protection within disaster risk management strategies.

• Improve the reach of civil registration services to increase the proportion of individuals (especially in remote areas) with identification documents and a National Identity Number.

• Consider the feasibility of using the MIS currently being developed for PKH to cover other social assistance programmes.

Regularise and strengthen social services (short-to-medium term)

• Implement the legislative framework for the provision of social services.

• Identify staffing needs and the competencies required by social workers to deliver social services across Indonesia.

• Improve the employment conditions of social workers and enable them to work across social programmes.

• Prioritise provision of early childhood development infrastructure and services, including family visits by social workers to PKH recipients.

Strengthen social insurance coverage among the missing middle (short term)

• Adopt a dual approach to improving social insurance coverage amongst (respectively) employees and own-account workers in the informal sector.

• Subsidise social security contributions of informal workers by covering the cost of employment injury insurance.

• Leverage JKN enrolment and awareness-raising to increase coverage by BPJS Labour.

• Revise contribution requirements to safeguard the financial sustainability of JKN without undermining the quality of services.

Reconfigure labour market interventions to meet the needs of Indonesia today (medium term)

• Review severance pay arrangements while enforcing pension contributions, especially among SMEs.

• Consider establishing an unemployment insurance arrangement.

• Invest in active labour market policies to promote productivity amongst vulnerable workers.

Revise decentralisation for coherence between national and sub-national government (medium term)

• Led by the Ministry of Home Affairs, promote coherence between national and sub-national government, for example by revising local minimum service standards to support social assistance programme implementation.

• Clarify and formalise financing responsibilities between national and sub-national government for social assistance provision.

• Strengthen engagement between MoSA and the Ministry of Villages, Disadvantaged Regions and Transmigration to embed social protection objectives and mechanisms within Village Fund projects.

Consolidate the institutional framework for social protection (medium term)

• Establish or empower a single institution with oversight of all social protection.

• Rationalise the number of ministries involved in social protection policy at national level, with MoSA playing a lead role.

Leverage social protection to offset gender disparities (medium term)

• Design specific active labour market policies for women not in education, employment or training.

• Consider incorporating care credits within the pension system.

• Consider including an earlier eligibility age for women in social assistance programmes for the elderly.