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Call for Papers: PIER Research Workshop 2025
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Discussion Paperdp
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Year
2025
2024
2023
2022
...
31 January 2022
20221643587200000
No. 171

Extending Pension Policy in Emerging Asia: An Overlapping-Generations Model Analysis for Indonesia

Abstract

This paper examines the economy-wide effects of government policies to extend public pensions in emerging Asia particularly pertinent given the region's large informal sector and rapid population ageing. We first document stylized facts about Indonesia's labour force, drawing on the Indonesian Family Life Survey (IFLS). This household survey is then used to calibrate micro behaviours in a stochastic, overlapping-generations (OLG) model with formal and informal labour. The benchmark model is calibrated to the Indonesian economy (2000–2019), fitted to Indonesian demographic, household survey, macroeconomic and fiscal data.

The model is applied to simulate pension policy extensions targeted to formal labour (contributory pension extensions to all formal workers with formal retirement age increased from 55 to 65), as well as to informal labour (introduction of non-contributory social pensions to informal 65+). First, abstracting from population ageing, we show that: (i) the first set of pension policy extensions (that have already been legislated and are being implemented in Indonesia) have positive effects on consumption, labour supply and welfare (of formal workers) (due largely to the formal retirement age extension); (ii) the introduction of social pensions targeted to informal workers at older age generates large welfare gains for currently living informal elderly; and (iii) the overall pension reform leads to higher welfare across the employment-skill distribution of households.

We then extend the model to account for demographic transition, finding that the overall pension reform makes the contributory pension system more sustainable but the fiscal cost of non-contributory social pensions more than triples to 1.7% of GDP in the long run. As an alternative, we examine application of a means-tested social pension system within the overall pension reform. We show that this counterfactual reduces the fiscal cost (of social pensions) and further increases the welfare for both current and future generations.

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JEL: E26J1J21J26H55H24C68
Tags: informal labourpopulation ageingsocial securitytaxationredistributionstochastic general equilibrium
The views expressed in this workshop do not necessarily reflect the views of the Puey Ungphakorn Institute for Economic Research or the Bank of Thailand.
George Kudrna
George Kudrna
John Piggott
John Piggott
Phitawat Poonpolkul
Phitawat Poonpolkul
Puey Ungphakorn Institute for Economic Research

Puey Ungphakorn Institute for Economic Research

273 Samsen Rd, Phra Nakhon, Bangkok 10200

Phone: 0-2283-6066

Email: pier@bot.or.th

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