Indonesia’s Pension System Faces Crisis as Gaps Grow and Retirement Security Fades

The 2025 OECD report Addressing the Challenges for Asset-backed Pensions in Indonesia, produced by the Capital Markets and Financial Institutions Division of the OECD in partnership with Indonesia’s Financial Services Authority (OJK) and with support from the Government of Japan, presents a sobering evaluation of Indonesia’s pension system. While the establishment of mandatory asset-backed pension schemes in 2015 was a milestone, the current structure remains inequitable, fragmented, and inadequate in delivering retirement security. The system is dominated by disparity: civil servants enjoy robust defined benefit (DB) pensions under the Taspen program, while the majority of private sector and informal workers are left with inconsistent, underfunded, or voluntary schemes. With informal employment comprising nearly 60% of the workforce and women disproportionately concentrated in this sector, large swathes of the population remain vulnerable to poverty in old age. Even formal workers in small or micro enterprises often lack access to comprehensive schemes such as the BPJS-JP (the main DB plan for private sector employees), leaving them with only the BPJS-JHT defined contribution (DC) plan, or worse, entirely reliant on voluntary personal plans.

A Retirement System Designed for Early Withdrawals

At the heart of Indonesia’s pension challenges is a system that enables and even encourages premature access to retirement savings. While official projections show generous replacement rates, 91.6% for civil servants and up to 53.5% for formal private workers, these figures assume uninterrupted contributions over 40 years, which is rarely achievable in a labour market marked by high informality and turnover. The reality is that most workers will retire with insufficient funds or none at all. Under current rules, individuals can withdraw their JHT (DC) savings in full after just five years when changing jobs. This provision has led to mass leakage of retirement savings: Figure 1.6 on page 25 of the report shows that resignation, not retirement, is the dominant trigger for withdrawals. Since BPJS-JP benefits require a minimum of 15 years of contributions to qualify for a lifelong pension, many workers will only receive a lump sum, thereby diluting the system’s role in ensuring long-term financial security.

Underperforming Investments and Conservative Portfolios

Indonesia’s pension funds, both mandatory and voluntary, suffer from overly cautious investment strategies that significantly limit returns. According to the report, more than 80% of BPJS pension fund assets are invested in government bonds, Islamic bonds, and bank deposits. While this conservative allocation protects capital, it fails to match the long-term nature of retirement liabilities. Until 2023, anti-corruption legislation deterred fund managers from selling assets at a loss, creating an unintended disincentive for strategic rebalancing. Although reforms have introduced flexibility, major hurdles remain, including a 30% minimum allocation to government bonds and a near-total prohibition on foreign investment. Even voluntary plans managed by financial institutions (DPLKs) exhibit extreme conservatism, with over half of their portfolios held in cash and deposits. Governance structures further exacerbate underperformance, as many board members lack technical pension knowledge, and investment performance metrics are poorly defined or absent altogether.

Cracks in the Sustainability of Defined Benefit Schemes

The long-term solvency of Indonesia’s defined benefit pension programs is in serious jeopardy. Contributions to the BPJS-JP scheme stand at only 3% of salary, while actuarially fair levels would require closer to 5% or more. Without reform, the Ministry of Finance projects that the scheme’s assets could be exhausted by 2070. Voluntary occupational DB plans fare no better. These are often underfunded due to inflated discount rates, some as high as 10%, and many include unpaid employer contributions in their funding calculations, creating a distorted picture of solvency. Moreover, occupational pension funds are frequently used to cover severance obligations rather than retirement income, incentivizing capital preservation over growth. The report reveals wide fluctuations in investment returns, with no consistent link between strategy and performance. While some reforms have been enacted to reduce severance entitlements and reroute contributions to BPJS-JHT for lower-income employees, employers can still use pension assets to cover liabilities for higher earners.

A Call for Systemic Overhaul and Policy Clarity

The OECD proposes a bold and comprehensive set of reforms to tackle these challenges. First, the retirement age should be harmonized across all schemes to eliminate the incentive for early withdrawal, with the BPJS-JHT and BPJS-JP aligned closer to international norms, as OECD countries are targeting retirement ages above 65. Second, early withdrawals should be limited to exceptional circumstances, and the tax treatment between lump sums and annuities must be neutral to discourage premature cash-outs. Third, Indonesia should abandon the outdated requirement to invest a minimum share in government bonds and relax restrictions on foreign investments, enabling diversification and improved returns. Lifecycle investment strategies should be made the default in DC plans, and new benchmarks for long-term performance must be adopted. Additionally, the severance system should be scrapped altogether and replaced with increased employer contributions to BPJS-JHT, while any new mandatory schemes, such as the one for high earners, must be clearly defined in purpose and integrated coherently into the broader framework. The introduction of a pension protection fund, while desirable in principle, should be delayed until DB plans are better funded.

The OECD’s central warning is clear: unless Indonesia reforms its pension system with urgency and vision, millions risk entering retirement without the financial means to live with dignity. The report urges policymakers to seize this moment of transition, leveraging international best practices not just to patch up a broken system but to rebuild it into one that is equitable, sustainable, and resilient for generations to come.