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A dynamic model of retirement in Indonesia
Would more Indonesian men participate in pension schemes if given the chance?
Authors:
D. McKee
Publisher:
California Center for Population Research, USA, 2006
This paper builds and estimates a structural dynamic model to simulate the effects of demographic change on labour supply for older men in Indonesia It evaluates two possible public pension reforms, which may be necessary to address the growing needs of an ageing population.
The paper:
- reviews the literature and summarises patterns and determinants of old age labour supply in both developed and developing countries
- describes the Indonesian context and presents a dynamic structural model of old age labour supply that is appropriate for this context
- discusses the data and the methods used to estimate the model.and presents the estimation results
- uses simulation experiments to examine the possible effects of reductions in family support and to evaluate two potential pension reforms. and discusses ing possible policy implications and proposes directions for future work
The results show that families and health play a key role in labour supply choices in old age. When faced with declining family support, simulations show that older men stay in the labour force at ages when they would otherwise exit. Moreover, when pension benefits are extended to private sector workers, people switch from unemployment and self-employment into the private sector even when wages are taxed to pay for the pension programme. These results highlight the complexities of old age labour supply and pension reform in the context of rapidly developing societies.
The author concludes that using the model to simulate the effects of two potential pension reforms shows that expanding the existing government pension programme to the private sector results in many men switching into this sector from both self-employment and unemployment. That individuals change their work choices based on expectation of future benefits underscores the importance of modeling these decisions as forward-looking. When private sector employees must pay for their benefits through a tax on their wages, they continue to participate in large numbers, suggesting that individuals want to smooth consumption across the life course and many may not currently be able to do so. [adapted from author]
