The World Bank says Indonesia will start to see an ageing population from the year 2040 onward, implying the start of lower labor-force participation and lower savings rates, as well as the likely possibility of slowing economic growth. Therefore, the Washington-based financial institution advises the Indonesian government not to wait too long with reforming the pension system.

On Monday (23/05) Phillip O'Keefe, Chief Economist at the World Bank, delivered a speech in Jakarta on the topic of ageing populations in East Asia and the Pacific. He said the ageing process of the Indonesian population will not go as fast as in countries such as Japan or South Korea. However, starting from 2040 the negative effects of an ageing population should be felt in Indonesia as well. O'Keefe estimates that currently approximately six percent of the Indonesian population is aged over 65 years. By the year 2040, however, this figure is expected to have grown to 24 percent.

The greatest risk of an ageing population is the fiscal risk, O'Keefe said. If Indonesia does not reform its pension system well before 2040 then it may cause severe poverty among the elderly. This would mean that the government has to allocate a significant part of the annual state budget in order to support these people (financing their healthcare costs), hence the demographic bonus has turned into a demographic disaster or burden.

Currently, few Indonesians set aside part of their monthly salaries for their retirement. Moreover, Indonesia has no pension scheme for informal workers (while informal workers may account around 60 percent of the nation's labor force). O'Keefe said Indonesia should adopt the pension system as is being applied in countries such as Vietnam, Thailand or Mongolia. These countries have a more systematic and effective pension system that also includes the nations' informal workers. This system basically consists of collecting part from all employees' salaries and use these funds to support the economic cost of the nation's elderly people.