The Joko “Jokowi” Widodo administration has finally revised Government Regulation (PP) No. 46/2015 on old-age and pension benefits. The revision was made through PP No. 60/2015 to accommodate trade union demands, which were supported by the House of Representatives, to allow for an earlier claim for a lump-sum withdrawal of the benefit before the initial set retirement age of 56.

This affects workers who lost their jobs with only a month’s notice, who will now be able to enjoy their savings early. This “populist” move by Jokowi was misplaced. The unions have no other option to protect income security due to the absence of law enforcement on severance payments, which are required under the 2003 Indonesian Labor Law.

The revised rules merely create ambiguity and confusion as they now define workers who are dismissed from their jobs as “pensioners” who become entitled to early access to their accumulated savings from the old-age and pension benefits.

It is obvious there is an urgent need for the government to revisit the old-age and pension benefit system and prepare proper unemployment benefits, both to provide income security for our future pensioners and to address uncertainty for those temporarily forced out of the labor market.

A key element of this ambiguity and confusion is treating the statutory old-age and pension benefit — a mechanism designed to address the risks of income loss in old age — as a way of mitigating unemployment in preretirement years.

While it is understandable that the unions have pushed for a flexible cash withdrawal arrangement from the old-age and pension benefit, it is illogical and counterproductive. It is true that workers do not have any option to secure their income in the absence of adequate unemployment benefits. But fiddling with the aged pension is not the answer.

From the employer side, the current arrangement for a mandatory severance or termination allowance is too expensive, since overall they now have to allocate a much higher allowance for severance — a maximum of 25 months after the 2003 reforms compared with only 10 months previously.

A properly designed safety net to help the vulnerable during unemployment with a separate initiative is urgently needed in the current economic downturn, given the surge in dismissals and the volatility of the labor market generally.

The implementation of the existing arrangement for mandatory severance payments has been problematic. Anecdotal evidence suggests that only a few companies have allocated severance payments in their forward budget to anticipate possible redundancies and dismissals.

In addition, legal claims by workers for the recovery of severance payments is a laborious process that can take up to five years.

Despite these many labor disputes regarding severance pay, Indonesia is no closer to establishing any concrete policy or fair and efficient mechanism to support those in need.

Allowing earlier claims on old-age and pension benefits for the unemployed will simply undermine the purpose for which the pension and social security scheme was set up. The National Social Security Council (DJSN) has estimated total cash withdrawals from the benefit will reach between Rp 20 to Rp 30 trillion (US$2.04 billion) this year alone.

This will potentially undermine the sustainability of social protection for genuine pensioners and retirees. The new provisions also add to the actuarial difficulty of ensuring the financial solvency of the program.

There is no point in allowing lump-sum withdrawal from the old-age benefit that will erode the eventual level of the benefit and impact negatively on the pension program.

This is not a new concern for unions. They have previously voiced doubts about the legal and financial certainty of the old-age and pension benefits system. Chief among these concerns is the planned decrease in the current contribution rate from 8 percent (with a shared contribution by workers and employers of 3 percent and 5 percent, respectively) to eventually only a 3 percent contribution rate (1 percent by workers and 2 percent by employers).

As for pension benefits, taking into account employers’ contributions to other mandated schemes such as work injury and health schemes, many have arrived beyond the limit that they can afford to pay.

For the pension program, earlier actuarial studies suggest that such a contribution rate of 3 percent of workers’ monthly salaries (with possible increases in the future) is still adequate to ensure the minimum 40 percent replacement rate (based on the 1952 International Labor Organization Convention 102 on Minimum Standards on Social Security) of the last employment income of the retiree.

To guarantee this replacement rate, however, requires a length of service from 15 years old until the set minimum retiring age of 56 and scheme membership of at least 34 million to make it sustainable.

This scenario assumes steady economic conditions, continuing economic growth, modest return on investment and low inflation of 7.5 percent and 4.5 percent, respectively, per year over the long term. However, under the present circumstances, increasing the pension contribution rate is needed, simply because the current rate of 3 percent is not enough.

With current membership of pension schemes at about 1 million, and with a projected increase of only 3 million per year, it is clear that we have a long way to go to achieve the international benchmark of the minimum income replacement rate.

Initially, a higher contribution rate would help to ensure the benefit sustainability and adequacy while the membership is still very low.

Setting a higher contribution for the scheme from the beginning might prevent potential disagreements or future negotiation deadlock between stakeholders of workers and employers. Scheme sustainability will depend on multiple elements of the overall scheme design — elements such as membership uptake and contribution rate, replacement income target, the minimum duration of contributions, the access age, how funds are invested and governance arrangements.

It is in the best interests of everyone if the government drops old ideas, promotes a universal scheme and encourages rapid membership uptake to make the scheme economically efficient (economies of scale).

There is no point in allowing lump-sum withdrawal from the old-age benefit that will erode the eventual level of the benefit and impact negatively on the pension program.

This is the reason why the portability aspect will be key in ensuring sustainability and adequacy of the benefits. The fund will remain with a worker for life and accrue across many employers.