Abstract
Many developing countries are currently facing an ageing population without sufficient preparation for old-age financial adequacy, an important component in active ageing. One question is whether a pension system can create old-age financial adequacy. At the same time, many countries are shifting their pension systems from a defined benefit to a defined contribution pension system to improve the welfare of older people while maintaining state budget sustainability. Indonesia is not an exception. This paper learns from civil servants in Indonesia, where the retirement payout from the existing pay-as-you-go, defined benefit system is meagre. The system is to be transformed into a defined contribution one. Using a simulation method, this paper examines whether the proposed system will provide a better retirement payout, which is higher than the minimum wage and will allow retirees to maintain their pre-retirement income. This paper concludes that the proposed system alone is not sufficient to create old-age financial adequacy and, therefore, is less able to contribute to active ageing. To improve the retirement payout, among other things, the retirement age should be raised and made optional, and the accumulated savings should be re-invested during the retirement period.
Highlights
This paper examines to what extent the proposed defined contribution system for civil servants can contribute to active ageing through old-age financial adequacy in Indonesia, a developing Asian country anticipating an ageing population
This paper provides lessons from the expected pension reform in Indonesia’s civil servants, with respect to its contribution on active ageing through financial adequacy
The most important lesson is that the reform from a defined benefit pension system to a defined contribution system is not necessarily sufficient to let retirees age actively through their old-age financial adequacy
Summary
“Active ageing” is a framework used by WHO (2002), viewing old age as the opportunity to be healthy, to participate in society, and to be secure (including economic security). This framework has been widely followed in Europe since 2005 as a policy response to challenges brought about by the ageing population (Foster and Walker 2014; Principi et al 2018). This concept refuted the “dependency” concept, which emphasizes the passivity of older people, as elaborated by Foster and Walker (2021)
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