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
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 operation of social pension, 11 5. Conclusion, 14 6. Selected bibliography, 15 2
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 of 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. 3
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. 4
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 5
d. A variety of monthly pension benefits (2009) i. USA : USD 2323 - Single (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 : Won 400,000 - Single (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) 6
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) 7
3. THE METHOD a. The benefit of DBP is a function of wage percentage to whether it is 33% or 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. 8
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 of 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 9
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 operating 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. 10
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). 11
TABLE 1. CORRELATION OF LENGTH OF PAYING CONTRIBUTION AS 7% ENTO AND DURATION OF BENEFIT TO BE SPENT No Length Compound Annual Accumulated Annual Duration of interest pension pension con- pension of benefit paying factor of contribu- tributions of benefit to spend contribu 6,5% tion 7% (APC) (Rp 000) (year) -tion (year) (Rp 000) (Rp 000) (year) (1) (2) (3) (4) (5) = (3)(4) (6) (7)=(5)/(6) 1 15 28.2 840 23,688 3,960 5.98 2 20 48.4 840 40,656 3,960 10.27 3 25 78.6 840 66,024 3,960 16.67 4 30 135.9 840 114,156 3,960 28.82 5 35 192.7 840 161,868 3,960 40.87 Source: Author (2011) 12
b. Deficit operation of social pension b1. The contributions (c): 7%, 10% and 15% respectively, b2. Length of paying contribution (L PC ): 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 (L S ) and (c) deficit financing of the plan. The response is as follows: Compounding interest factor of 8.5% for 15 years (C IF ) = 28.2 Contribution accounts Total pension benefits Deficit (a) (b) (c)=(a)-(b) (c) (C IF ) Pf (L PC ) (P S ) 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 13
Recommend
More recommend
