Tackling Informality: Expanding Retirement Savings for Indonesia’s Workers

A recent report by the World Bank titled “Unpacking Informality: Expanding Retirement Savings Coverage for Informal Workers in Indonesia” highlights the urgent need to improve retirement savings coverage for informal workers in Indonesia, who make up 60% of the workforce. Barriers such as limited financial literacy, irregular income, and lack of trust in government schemes hinder participation in these programs. The report suggests flexible policy reforms, the use of digital platforms, and financial incentives to expand coverage, particularly in sectors like agriculture and construction, where challenges are most severe.

Indonesia’s informal workforce, which makes up 60% of its employed population, faces significant challenges in securing financial stability for their retirement years. Despite the National Social Security System (SJSN) introduced in 2004 to protect workers from health and employment-related risks, the participation of informal workers in retirement savings programs remains alarmingly low.

“Unpacking Informality: Expanding Retirement Savings Coverage for Informal Workers in Indonesia,” by the World Bank, illuminates this critical issue. The report delves into the barriers preventing informal workers from enrolling in retirement schemes and outlines strategies to close the coverage gap.

Barriers to Retirement Savings

While retirement savings programs are technically available to all workers in Indonesia, informal workers face unique obstacles. A key issue is a lack of awareness. Many informal workers, particularly those in rural and remote areas, do not know they are eligible for these programs. In sectors like agriculture and construction, where the majority of workers are informal, knowledge of social security programs like the Jaminan Hari Tua (JHT) remains low.

Beyond a lack of awareness, financial instability also plays a significant role in discouraging participation. Informal workers often deal with unpredictable income, making it difficult to commit to regular savings contributions. These workers earn on average only half of what formal employees make, with daily or weekly earnings rather than a stable monthly income. Many are geographically hard to reach and operate in sectors where digital literacy is low, adding to the challenge of reaching them with effective outreach.

Financial literacy is another significant barrier. The report found that many informal workers are not familiar with basic financial concepts, such as compound interest, which impacts their ability to make informed decisions about saving for retirement. Despite these knowledge gaps, there is a notable overconfidence among workers about their financial capabilities. This mismatch between perceived and actual financial literacy can prevent workers from taking proactive steps toward securing their financial futures.

Coverage Gaps Across Sectors

Not all sectors face the same level of challenge when it comes to expanding retirement savings coverage. Workers in sectors like agriculture and construction are among the most difficult to reach. The majority of these workers are older, with lower levels of education and income, making them less likely to participate in social security schemes. These sectors also see a higher prevalence of the belief that children and families will provide for elderly parents, further reducing the incentive to save for retirement.

In contrast, workers in the digital economy or micro and small enterprises have shown greater potential for engaging in retirement savings programs. These workers are generally younger, better educated, and more familiar with digital platforms, making them easier to reach through modern communication and registration efforts.

The report also highlights that while 43% of informal workers have some form of retirement savings, only a small portion contribute to formal savings schemes like JHT. Instead, many workers rely on general savings accounts that may not be sufficient to support them in old age. The challenge, therefore, is not only to encourage saving but to ensure that workers are enrolled in formal savings programs that provide adequate financial protection for their later years.

Path Forward: Flexible Solutions

The World Bank’s report suggests several strategies to improve retirement savings coverage for informal workers. Key among them is reforming the design of existing programs. For example, allowing workers more flexibility in the amount and frequency of their contributions could help alleviate the financial pressure that discourages many informal workers from enrolling.

Additionally, using digital platforms to facilitate the registration and contribution process is crucial. Digital platforms like Gojek and Grab have already taken steps to facilitate participation in social security schemes for gig workers, but there is still a long way to go. Expanding such efforts to other informal sectors could significantly boost participation rates.

Offering financial incentives, such as matching contributions or subsidized premiums, is another proposed solution. International examples from countries like Thailand and China show that even modest subsidies can dramatically increase participation in retirement savings programs. By easing the financial burden on informal workers, these incentives could encourage greater engagement with formal savings schemes.

While these reforms would mark a significant step forward, the report emphasizes that the informal economy is highly diverse, meaning that a one-size-fits-all approach is unlikely to succeed. Tailored solutions that address the specific needs and challenges of each sector are necessary for meaningful progress.

Expanding retirement savings coverage for informal workers in Indonesia is an urgent issue, especially as the country’s population continues to age. By addressing the barriers of financial instability, low literacy, and geographic inaccessibility, and by implementing flexible and incentivized solutions, Indonesia can take significant steps toward ensuring that all its workers can retire with financial security.

The journey ahead is challenging, but with targeted reforms and innovative solutions, Indonesia’s informal workers can begin to build a safer financial future.