Financing Older Persons in Indonesia

WIDJAJA, MULIADI (2012). "Financing Older Persons in Indonesia" Paper presented at the 9th annual conference of the HDCA, 5-7 September 2012, Jakarta, Indonesia.

In developing countries, where the size of informal labor sector is large, the pay-as-yougo pension system is inapplicable. However, in order to maintain the distributional effect of a pension system, a kind of cash transfer for older persons, taken from consumption taxes, is applicable. This notion of applying consumption taxes for older person income is novel as it has never been applied anywhere, not even in Indonesia. This study analyzes how the capacity of consumption tax in Indonesian provinces is able to finance the economic life of older persons. The methodology and steps taken in this research : a). Identifying consumption function for each province by using Life Cycle Permanent Income Hypothesis (LCPIH) consumption function econometric model; b). Predicting consumption function according to population trajectory for each province by using the Arima econometrics model ; c). Predicting the necessity amount of fund for older person financing; d). Calculating the deficits (surplus) of the consumption tax under the older person financing . The findings are as such: from the 30 provinces observed, 4 provinces show a low marginal tax rate (ranges lower than 2 percent). While 13 provinces experience medium marginal tax rate (ranges from 2 percent to 4 percent), the rest 13 provinces shows high marginal tax rate ( 4 percent and above). In addition, From the 30 provinces observed, there are 10 Provinces show decreasing marginal tax indicators; 3 provinces show relatively constant marginal tax indicators; while the rest 17 provinces show increasing marginal tax indicators. The conclusions are: first, consumption taxes are applicable in Indonesia to finance older person economic life. Second, because not all Indonesian provinces are able to perform this type of taxes without charging too high tax rate, some of the provinces which are not capable should find assistance from the central government in terms of block grant.
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