Bridging the Gap: Strategies to Increase Retirement Savings Among Indonesia’s Informal Workforce

The World Bank report highlights the challenges of expanding retirement savings coverage for Indonesia's informal workers due to low awareness, irregular incomes, and financial instability. It recommends flexible program designs, government subsidies, and leveraging digital platforms to improve participation.

The World Bank’s report led by Ilsa Meidina and Tanya Adi Putri from the Social Protection and Jobs team, delves into the persistent challenge of expanding retirement savings coverage among Indonesia's informal workforce. Despite establishing Indonesia’s National Social Security System (SJSN) in 2004, which theoretically covers all workers against health and employment-related risks, the participation rate of informal workers in retirement savings programs remains alarmingly low. By 2021, over 60% of the workforce in Indonesia was in the informal sector, yet only a small fraction just 9.4% were contributing to a formal retirement savings program like Jaminan Hari Tua (JHT), a public defined contribution pension scheme. The report highlights the crucial barriers to this low participation and offers strategies to increase coverage.

The Challenge of Informal Workers’ Participation in Retirement Savings

One of the most pressing issues is that informal workers, who often experience unstable income and lack of access to formal financial systems, face significant challenges in contributing to long-term savings plans. Many are part of the “missing middle” too well-off to qualify for social assistance programs but not financially stable enough to make voluntary contributions to retirement programs. Informal workers are geographically dispersed, often in rural and hard-to-reach areas, or engaged in sectors with lower digital literacy, making outreach and enrollment difficult. A considerable portion of these workers, particularly in agriculture and construction, rely on the expectation that their children or families will support them in old age, which diminishes their perceived need to save for retirement.

A Diverse Informal Sector Requires Targeted Solutions

The report also underscores the diverse nature of the informal sector. Workers in more traditional sectors, such as agriculture or construction, have low levels of education and financial literacy. Many of them, especially older workers, face limited income and unpredictable earnings, making saving for retirement a challenge. For instance, only 30% of workers in the agriculture sector have any form of retirement savings, and even fewer contribute to the JHT scheme. In contrast, younger, better-educated digital workers who engage with online platforms for gig work tend to have higher levels of financial literacy and are more likely to save for retirement, although even among them, participation in formal retirement savings programs remains low. This variation illustrates that a one-size-fits-all approach will not work when it comes to increasing retirement savings coverage among informal workers.

Key Barriers to Expanding Retirement Coverage

Key reasons behind the low uptake of retirement savings among informal workers include a lack of knowledge about the available programs, perceptions of ineligibility, and concerns about the future ability to contribute due to irregular incomes. Many informal workers are unaware that they are eligible to participate in the JHT scheme or other social security programs. Even when they are aware, concerns over their ability to maintain regular contributions, coupled with the complexity of enrolling in these programs, often lead to non-participation. The existing system requires informal workers to first participate in the work injury and life insurance programs (JKK/JKM) before enrolling in JHT, which can be financially burdensome for those with limited income.

Government Efforts and Remaining Gaps

The report points out that Indonesia’s government has been aware of these challenges and has taken steps to address them. For example, in 2021, a Presidential Instruction mandated various ministries and government institutions to take measures to increase social security program participation among workers, including informal ones. The government has set an ambitious target to cover 30% of both formal and informal workers by 2024 and plans to subsidize contributions for 20 million workers. However, these efforts have yet to translate into significant improvements in retirement savings participation among informal workers.

Recommendations for Expanding Retirement Savings

To overcome these barriers, the report recommends several strategies. One approach is to offer more flexibility in the design of the JHT program, such as allowing informal workers to participate without first contributing to the JKK/JKM schemes and enabling more flexible payment schedules. Government subsidies for low-income informal workers, similar to successful models in countries like China and Thailand, could also help boost participation. Additionally, the government could leverage digital platforms to expand coverage among gig economy workers and young, urban professionals who are already more digitally literate and reachable.

Outreach and education are critical components of this strategy. Informal workers need simple, clear information about their eligibility and the benefits of participating in retirement savings programs. Efforts should be made to shift perceptions away from relying on family for old-age support and toward understanding the importance of self-sufficiency in retirement. Digital platforms, which already engage millions of workers, could play a crucial role in facilitating registration and contribution payments, while targeted outreach programs could focus on those workers who are currently the hardest to reach, such as those in rural areas or traditional sectors. In the long term, creating a unified social security registration system that integrates health insurance and employment social security could streamline the enrollment process for informal workers and make it easier for them to participate.

Expanding retirement savings coverage for Indonesia’s informal workers is a complex challenge that requires a multi-faceted approach. By offering more flexible program designs, providing government incentives, and leveraging digital platforms for outreach, Indonesia can begin to address the barriers that have prevented informal workers from participating in formal retirement savings schemes. The report by the World Bank’s Social Protection and Jobs team provides a detailed roadmap for how the country can move toward achieving broader retirement security for its informal workforce.