Indonesia’s Pension Crisis Looms as OECD Warns of Low Coverage and Sustainability Gaps

The 2025 OECD report titled "Addressing the Challenges for Asset-backed Pensions in Indonesia", developed by the Capital Markets and Financial Institutions Division of the OECD Directorate for Financial and Enterprise Affairs in collaboration with the Indonesian Financial Services Authority (OJK), and financially supported by the Government of Japan, offers a timely and comprehensive examination of Indonesia’s evolving pension system. Despite significant reforms, including the launch of mandatory asset-backed pension schemes in 2015, the country continues to grapple with low coverage, weak savings incentives, and long-term sustainability concerns. The report highlights not only institutional and regulatory shortcomings but also the broader socioeconomic dynamics, such as informality, gender inequality, and labor fragmentation, that constrain Indonesia’s efforts to deliver adequate retirement income for its aging population.

A System that Fails to Cover the Majority

Indonesia’s pension system is a patchwork of programs offering vastly different benefits depending on occupation, employer size, and formality of employment. While civil servants enjoy relatively generous coverage under the Taspen scheme, which includes defined benefit and defined contribution components, workers in the private sector, especially those employed by small and micro enterprises, are often excluded or only partially covered. Informal workers, who constitute nearly 60% of the labor force, can only opt into the BPJS-JHT (defined contribution) scheme voluntarily, with low participation rates. Women are particularly disadvantaged: with a labor participation rate of just 53.4%, compared to 83.9% for men, and a higher likelihood of informal employment, their coverage and eventual benefits are significantly lower.

Even within the formal sector, the system remains uneven. Small and micro enterprise workers often lack access to the defined benefit JP scheme, and even among larger employers, many workers do not contribute consistently due to low compliance. This fragmented participation undermines the goal of building long-term, sustainable retirement savings, as few workers accumulate the required 15 years of contributions to qualify for lifelong pension payments under JP. Most will instead receive only lump sums, typically inadequate for long-term retirement income.

Early Withdrawals and Low Savings Discipline

One of the most significant flaws in Indonesia’s pension system is the ease with which workers can access their savings prematurely. Under the BPJS-JHT scheme, members can withdraw their entire savings after five years of contributions if they change jobs, regardless of age or retirement status. Between 2016 and 2018, this provision resulted in millions of premature withdrawals each month. Only a small share of withdrawals were made at actual retirement. This undermines the entire premise of asset-backed pensions, which are designed to provide long-term financial security, not short-term liquidity.

Voluntary pension plans also face challenges with retention and accumulation. Participation in employer-sponsored plans (DPPK) and personal plans (DPLK) remains extremely low, covering only a small fraction of eligible workers. The low average income of many workers further restricts their capacity to contribute. Informal workers and the self-employed, who earn roughly half the net income of formal employees, often cannot spare the funds required to build meaningful savings over time. This further contributes to low replacement rates, particularly among those who need retirement income the most.

Ultra-Conservative Investments Limit Returns

The investment strategies of Indonesian pension funds are excessively conservative and poorly diversified. In 2022, over 50% of JHT assets were invested in government bonds, another 17% in Islamic bonds, and about 12% in short-term deposits. Only a small fraction, less than 20%, was allocated to potentially higher-yielding investments such as equities and mutual funds. This trend extends to voluntary pension funds as well. Financial institution-managed DPLKs allocated more than half of their portfolios to cash and deposits, with only 2% in equities.

This caution is rooted in both regulation and risk aversion. Prior to 2023, an anti-corruption law penalized public fund managers for realizing investment losses, effectively discouraging active management and locking institutions into low-yield strategies. Restrictions on foreign investment and mandatory allocations to government bonds further compound the problem. Pension funds are also frequently used by employers to hedge severance liabilities, which creates a perverse incentive to prioritize capital preservation over long-term growth. In this context, the retirement goal of wealth accumulation is fundamentally compromised.

Fragile Sustainability and Weak Oversight

Defined benefit plans, both public and occupational, are showing early signs of fiscal stress. The JP scheme, financed by a 3% contribution split between employers and employees, is not actuarially sound. The Ministry of Finance projects that it could deplete its assets by 2070 unless contribution rates increase or benefits are restructured. Meanwhile, voluntary occupational DB plans operate under loose actuarial standards, allowing over-optimistic assumptions about returns and funding. Many plans even report unpaid employer contributions as assets, inflating their apparent solvency.

Governance is another area of concern. While BPJS is governed by a multi-stakeholder board, only one member is required to have technical expertise in pensions. Voluntary plans often rely on supervisory boards with limited investment knowledge. In both cases, a lack of professional oversight hampers strategic asset allocation, risk management, and long-term performance assessment.

Pathways to a Stronger, Fairer Pension System

The OECD lays out a series of pragmatic and ambitious reforms. First, contribution rules and retirement ages should be harmonized across all schemes to avoid distortions and incentivize longer working lives. Second, the investment environment must be liberalized to enable diversification and better returns. This includes lifting restrictions on foreign assets and government bond mandates, and encouraging lifecycle strategies as default options. Third, early withdrawals from the JHT scheme should be limited to exceptional circumstances, and severance obligations should no longer be financed through pension funds. Instead, employer contributions could be redirected fully into retirement savings.

Crucially, Indonesia must clarify the objectives of each pension component. The severance pay system, which currently lacks coherence and compliance, should be phased out or merged into BPJS-JHT contributions. Likewise, the new mandatory pension scheme for high-income workers, though potentially beneficial, must not crowd out voluntary plans. The government should also consider introducing lifetime income products and even a public annuity provider to guarantee retirees some degree of income certainty.

If enacted holistically, these reforms could place Indonesia on a path toward a modern, equitable, and sustainable pension system, one that not only expands coverage but also secures dignified retirements for future generations.