The Political Challenges of Building a National Pension Program

JAKARTA – Jakartaweekly.com – Universal pension reform is not only about protecting older Indonesians. It is essential for strengthening long-term economic growth, expanding domestic investment, and preparing the country for a rapidly aging population.

Indonesia stands at a historic crossroads in its demographic transition. While the country continues to benefit from one of the world’s largest productive-age populations, estimated at 154 million in the labor force (Sakernas, 2025), the demographic dividend is gradually narrowing. By 2045, more than 65 million Indonesians, or 20 percent of the population, are projected to be 60 or older. Yet Indonesia lacks a robust pension system capable of providing income security for the coming elderly population.

This is not just a social policy challenge. It is also an economic and political challenge that will shape the country’s long-term prosperity. If pension reform is continually postponed, millions of Indonesians risk growing old before achieving economic security. At the same time, the country forfeits an opportunity to mobilize one of the world’s largest pools of long-term domestic investment. The introduction of Sovereign Capital of Danantara may not fully benefit the public at large. Most developed countries have large pension funds that support investment both domestically and abroad.

Aging Is No Longer Tomorrow’s Problem

Today, about 55 percent of the population is of working age, supporting approximately 34 million older persons and nearly 90 million children. However, this favorable age structure is temporary. As fertility declines and life expectancy increases (to 74 years as of 2025), the dependency ratio will rise substantially over the next two decades, placing greater pressure on families, labor markets, and public finances.

The challenge is particularly significant because Indonesia’s labor market remains dominated by informal employment. Nearly 60 percent of workers earn their living outside formal employment arrangements. Unlike wage workers, most informal workers lack stable, predictable earnings, employer-sponsored retirement benefits, or adequate savings. Many continue working into old age not by choice but because they have no other source of income or supportive families to secure their income in later years.

For decades, families have been the primary source of financial support in old age. But this traditional support is becoming increasingly fragile and risky. Smaller family sizes, driven by the continued rise in the cost of living, greater urban migration, changing household structures, and longer life expectancy, mean children can no longer be expected to shoulder the financial burden of their aging parents. Old-age income security can no longer be relied on family solidarity.

Pension Reform Is Economic Reform

Public debate often portrays pensions as an additional fiscal burden. This perspective overlooks their broader economic function. Around the world, well-designed public pension systems perform two critical roles simultaneously. On the one hand, they protect older citizens from poverty, and on the other hand, they can create large pools of long-term domestic capital that finance national development.

According to the Thinking Ahead Institute, global pension assets exceeded US$58 trillion in 2024. Countries such as Japan, South Korea, Singapore, Canada, and the Netherlands have accumulated pension assets that represent a substantial share of their national economies, providing long-term capital for infrastructure, government bonds, and other long-term investments.

Indonesia, despite being the world’s fourth most populous country, remains a striking outlier in pension funding. Its public pension assets remain among the smallest in Asia relative to its population. On a per capita basis, Malaysia’s Employees Provident Fund holds more than 50 times the retirement savings accumulated by Indonesia’s employees’ social security funds. All pension assets in Indonesia account for less than 10% of Indonesia’s GDP, far below those of its regional peers.

The implications extend far beyond old-age income security. A stronger domestic pension system would enable Indonesians to become long-term investors in their country’s future. Pension reform, therefore, should not be viewed merely as social policy. It is a strategic and rational economic policy that builds economic resilience and financial sovereignty.

The Real Obstacle Is Political Commitment

The greatest barrier to pension reform is neither demographic nor technical. It is political. Building a universal pension system requires policymakers to look beyond electoral cycles and short-term fiscal constraints. Unfortunately, pension reforms are often perceived as imposing financial costs today while delivering benefits decades later, a difficult proposition in democratic politics, where immediate concerns frequently dominate public debate.

Additionally, Indonesia faces a challenge: public trust in the management of pension funds. Financial scandals at several state-owned financial institutions and insurance companies have eroded confidence in long-term pension programs. Although BPJS Ketenagakerjaan has made important progress since its establishment, many workers, employers, legislators, and even policy experts remain unconvinced that Indonesia’s pension institutions have the governance, transparency, and accountability needed to manage significantly larger retirement funds over many decades.

This trust deficit has tangible consequences.

Participation in the BPJS Ketenagakerjaan pension program remains low. As of 2025, only about 14 million formal-sector workers were enrolled in the national pension program, and fewer than 9 million informal workers had joined voluntary schemes, representing only a small fraction of Indonesia’s enormous informal workforce. As a result, only about eight percent of today’s elderly population receives pension benefits. Without stronger public confidence, expanding pension coverage will remain an uphill battle, regardless of policy design.

A New Political Consensus

Indonesia cannot afford incremental adjustments alone. It needs a new political commitment to treat pension reform as a national development priority rather than a narrow labor or fiscal issue.

Pension reform should be an integral pillar of Indonesia’s long-term development strategy. As the country aims to become a high-income nation by 2045, old-age income security must be treated alongside education, healthcare, and infrastructure as a core investment in human capital.

Furthermore, as it expands its pension coverage, the country must develop an innovative model to ensure that informal workers can enrol and have sufficient pension income in old age. Digital contribution platforms, flexible contribution mechanisms, and targeted government matching contributions can significantly improve pension coverage for workers with irregular incomes.

Pension governance reforms are urgently needed. Independent oversight, stronger transparency requirements, professional fund management, and public transparency are essential for rebuilding confidence in the country’s pension system. After all, public trust is essential to achieving financial sustainability.

Additionally, Indonesia needs to create stronger incentives to increase pension participation among both informal and formal workers. Carefully designed tax incentives, matching contributions for vulnerable workers, and improved replacement ratios would make a universal pension system work as both a social and a financial policy.

Finally, pension reform should become a regular topic of public discourse by fostering broad social dialogue among government, employers, labor unions, academics, civil society, and financial experts. Sustainable pension systems depend not only on sound actuarial calculations but also on political legitimacy and public ownership.

Looking Ahead into the Future

Indonesia has repeatedly demonstrated its ability to undertake ambitious structural reforms when national interests demand them. Pension reform deserves similar political courage. An aging population is neither a crisis nor a burden. It is a predictable and inevitable demographic transition that can be managed successfully with forward-looking policies. Countries that invested early in universal pension systems, such as Japan, Australia, and European countries, now enjoy greater economic resilience, deeper domestic capital markets, and stronger protection against old-age poverty.

Indonesia still has time to act, but that window is narrowing.

The country’s demographic dividend will eventually fade. When it does, the quality of Indonesia’s pension system will determine whether millions of older Indonesians can retire with dignity or must continue working for less income. The government must decide whether Indonesia will finance its future development from workers’ pension funds and benefit them, or continue to depend on foreign capital that benefits foreign workers.

The political challenge, therefore, is not simply to build a better pension system. It is to build the long-term political commitment necessary to secure Indonesia’s economic future.

A nation with high aspirations to become one of the world’s leading economies cannot leave old-age income security to chance. Pension reform is no longer simply a matter of social protection. It is a must, an investment in Indonesia’s future prosperity, social cohesion, economic development, and national resilience. The time to build that future is now.

Opinion by: By Dyah Larasati, Executive Director and Co-Founder of Arunala Institute and Foundation Indonesia and Hasbullah Thabrany, a former member of the SJSN Task Force that wrote the SJSN Law.

Edited by : Rafael