RD-RI52 *15 THE ANALYSIS OF SOCIAL INSURANCE BENEFITS PROVIDED FOR in1THE INDONESIAN MILITARY PERSONNEL(U) NAYAL POSTGRADUATE

UNCLSSIIEDSCHOOL MONTEREY CA E NOEGROHO JUN 94 F639 M

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NAIIUNAI RlIPF4IH OF RIANrAF)'.!( A

NAVAL POSTGRADUATE SCHOOLMonterey, California

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DTK CAEILECTL,

S2 9 19SETHESIS ,,,,- "

THE ANALYSIS OF SOCIAL TISURANCE BF'TTT-77

PROVIDED FOR

THE IIDONESIA TI ' "MITRV PFRF(CM''VEL

LLaby

Edy 'loeuroho2Tune 1'lo 4

Thesis Advisor: Shu Liao

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85. . ...... .

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IJNC LAS S IT7-ESECURITY CLASSIFICATION lV T"IS PAGE (U),hln Date Entered)SREPORT DOCUMENTATION PAGEREDISRCON

READ INSTRUCTIONSRBEFORE COMPLETING FORM

I. REPORT NUMBER z GOVT ACCESSION NO. 3 REC1.IENTS CATALOG NUMBER

4. TITL E (endl Subtitle) S TYPE OF REPORT & PERIOD COVERED

The Analvsis of Social Insurance "aster's Thesis

Benefits Provided for the Indonesian June 1053L6. PERFORMING ORG. REPORT NUMBERMilitary Personnel

7. AUTmOR(a) 0. CONTRACT OR GRANT NUMBER(*)

.ddv .loeroho

9. PERFORMING ORGANIZATION NAME AND ADDRESS 10. PROGRAM ELEMENT. PROJECT, TASK

AREA & WORK UNIT NUMBERS

Naval Postgraduate SchoolYonterey, California 93943

11. CONTROLLING OFFICE NAME AND ADDRESS 12. REPORT DATE

Naval Postgraduate School June 1984

Monterey, California 93943 13. NUMBER OF PAGES91

14. MONITORING AGENCY NAME & ADDRESS(II djferent fron ContPollin Ofllice) IS. SECURITY CLASS. rof Ihi report.

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19 K tY * S C orltirnue on -o o , Wo It noctomrv and Ienettv by block numbe,)

Actuarial Calculation, Benefits, Burial Compensation, rareer

Pattern, Contributions, Tndonesian Militarv Personnel, Lum- um-

Payment Benefit, Private Insurance, Social Insurance, 2ocial

Security, PEPUM ASA.9PI, Present Value "ethod..

1- AOST A " ' o nIunr tn revo,,.. gle Ii it no, " .. ry Icver nla v bv block number)

Cocial insurance is a comrulsorv insurance nroaram, which is now

commonly apnlied throughout the world. Indonesia has also adopted..

social insurance programs, which for the military personne! is

manaq.e1 by a iovernmrent insurance cornoanv called P.. ., ASAPP.This thesis analyzes the social insurance benefits provided =r'r

the indoneian militarv personnel, particularly the benefits rom

the savings -s-ect o the insurance -rocrram. The present value

DD 1, 3 1473 EDITION 1 o- 6T "IS" OSOLETE

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... ..... . . . . .. . ... .........

SECURITY CLASSIFICATION OF TH4IS PAGE (When Date Entered)

me-thc is aoidto calculate the contributions made a hyn!:o-tn-e-'-al military -o::icer and the benef its he qQulA be en-*ljBasedl on this analvsis, recommeniattions are suc-ested for abetter and fairer benefit scheme, while not threatening the con-tinuity of the comTnanv' s oneration.

S N 102 LF-014-660

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AIcved for public release; aistrinution unlimited.

The Analysis of Social Insurance BenefitsProvided for the Indonesian Military Personnel.

by

Eddy NoegzohoCommander, Indonesian Navy

B.S., Gajah Mada University, 1963

Submitted in artial fulfillment of the

requirements for tne degree of

MASTER CE SCIENCE IN MANAGEMENT

frcm the

NAVAl POSTGRADUATE SCHOOLJune 1984

Author:

Approved by:__

Thesis Advisor

Second Reader

Chairman, Department of Administrative Science

lean of Information and Policy Sciences

3

ABSIBACT

Social insurance is a cczulsory insurance program, -

which is now commonly applied throughout the world. "

Indonesia has also adopted social insurance programs, which S

for the ailitary perscnne is managed by a government insur-

ance ccmpany called EIRUM ASABBI. This thesis analyzes the

social insurance benefits provided for the Indonesian mili-

tary jersonnel, particularly the benefits from the savings •

aspect of the insurance progra:. The present value method

is apFlied to calculate the contributions made by a hy.o-

thetical military officer and the benefits he would be enti-

tled. Based on this analysis, recommendations are suggested .

for a tetter and fairer benefit scheme, while not threat-

ening the ccntinuity cf the company's operation.

4

7

TABLE CF CONTENTS

I. INIRCDUCTION . 9

A. SOCIAL INSURANCE ... 9

E. SOCIAL INSURANCE IN .INDONESIA . 10

C. THE ISSUES . 12

r. THE METHCLOLOGY ...... ............... 12

II. INSUEANCE: PRIVATE INSURANCE AND SOCIAL

INSURANCE .................... 14

A. INSURANCE AND ITS DEFINITION ........ 14

B. PRIVATE INSURANCE ............... 17

C. THE SOCIAI INSURANCE ............ 17

D. SOCIAL SFCURITY IN THE UNITED STATES .... 22

1. The Social Securit " Act 1935 .. ....... 22

2. The OASDHI Program ............ 24

3. Membership ...... ................ 25

4. Trust funds 26

5. Cash Benefits .............. 27

III. SCCIAL INSURANCE SYSTEM FOR THE MILITARY

kERSCNNEL IN INDONESIA ..... .............. 28

A. SOCIAL INSURANCE IN INDONESIA ........ 28

E. SOCIAL INSURANCE FOR THE 3ILITARY

PERSCNNEI IN INDCNISIA ........... 29

1. Considerations and Iissions ....... 29

2. The Actuarial Calculation ... ........ 29

3. The Current Investment Policy . ...... .. 31

4. The Irvestment Returns ..... .......... 34

5. The Ccmposition of the Invested Funds . 39

C. THE BENEFIT SCHEMES ..... ............. -44

5

1. The Type of Benefits ........... 44

2. The Rights of the Beneficiazies......

IV. TEE ERESENT VALUE iODEL FOR THE BENEFITSC AlC UlATI ON 54C LULTIN...............................54l!i iA. ASSUMPTICS ................. 4

E. SIMPLIFICATIONS ............... 55

C. THE MODEl. . ....... ................. 58

V. TEE USE Of THE PRESENT VALUE MODEL . ....... 62

A. THE CAREER PATTERN .... ............. 62

B. THE PRESENT VALUE CF THE CONIRIBUTIONS. . .. 67

C. THE PRESENT VALUE OF THE BENEFITS. ...... 71

L. THE COMPABISON OF THE P.V.OF

CONTRIBUTIONS AND BENEFITS ... .......... 77

VI. CCbCLUSIONS ANr rz.COMMENDATION3 ... .......... 83

lIST CF ZEEZRENCES ................... 88

..IBLICCRAPH .. ....................... 90

INITIAL DISTRIBUTION lIST . . . . . . . . ........ 91

6

*o

LIST OF TABLES

I. Division of the Insurance Business ........ 18

II. The Rate of Interest of the Government Banks . 35

III. The Bate of Dividend yiven by 13 Corporations - . 37

IV. The Composition of the Invested Funds ...... 41

V. The Financial Situation of PERU& ASABRI ..... 43

VI. The lump-Sum Payment Benefit .... ........... .45

VII. Tie Cash Value Benefit ..... .............. 47

VIII. The Cash Value Benefit (Continued) .. ........ 48

IX. Death Risk Insurance and Burial Comensation

Benefits ............................ 50

X. The Burial Comensation ..... ............. 52

XI. The Present Value Model ..... ............. 61

XII. Ile Career Pattern of the Indonesian Officer . 63

XIII. The Pay/Promoticn Pattern for a Slow Career

Cfficer ........ ..................... 64

XIV. The fay/Promotion Pattern zor a Medium Career

Officer ..................... 65

XV. The Pay/Promotion Pattern for a Fast Career

Officer ..................... 66

XVI. The Present Value Contributions of Slow Career

Officers ...................... 68

XVII. Ihe Present Value Contributions of Medium

Career Officers ....... ............... . 69

XVIII. The Present Value Contributions of Fast Career

Officers 70

XIX. Ile iresent Value Benefits for Slow Career

Officers ..................... 73

XX. The Present Value Benefits for Medium Career

Officers 74

7

1XI. IhE Eresent Value Benefits for Fast Career

officers........................75

XXII. rThe Ratio of P.V of the Benefits and the

Ccztributions...................76

XXIII. The New P.V. Benefits for Slow Career Ofiicers .79 -

XXIV. Tie New P.V. Eenefits for edium Career

officers........................80

XXV. Tie New P.V. Benefits for Fast Career Officers .81

XXVI. The New Ratio cf P.V of the Benefits and the

Ccntributions...................82

XXVII. The Equation formula of Contributions and

Benefits........................85

XXVIII.Ihe N'otation fcr the Ejuatioz Formula........86

8

I. INIRODUCTION

A. SCCIAL INSURANCE

Insurance in modern society is an important eccnonic

tool which has the fcllowing multiple uses: [Ref. 1]

1. introducing security into personal and zusiness situ-

ations,

2. providing a desirable means of savinj and a means of

capitalizing earning jower,

3. safeguarding beneficiaries from bankruptcy or

poverty, while serving tc eliminate their dependency on

cthers as a result oi such situations, and

4. picaoting econcmic development.

Insurance institutions have taken two basic fcrxs of

cwnershiE : private and public. Private insurance consists

of all types of coverage written by privately organized

groups, while public or social insurance includes all tyres

of coverage written ky governmental bodies. Theoretically,

social insurance is urlikely tc exist without the suprort of

the gcvernment, since no private insurers would have the

capability of managirg and financing the large populations

covered by such insurance.

The main text of this thesis will include both a discus-

sion and ccmparison of social insurance as it was cCncEived

and as it now exists in the United States, and the social

insurance system which is presently being implemented in

Indonesia. The Eurpcse for analyzin social insurance is to

determine whether or not the social insurance system which

presently exists in Indonesia as it relates to military

personnel is fair tc both the company and its zemters.

Specifically I plan to analyze the benefits provided by

9

PERUM ASABRI using tIe present value method to determine its

fairness.

The Social Security Act, cne example of the izplementa-

tion cf a social insurance plan, was launched in 1935 by the

United States Governient. The Act was put into effect at a

time uhen public exenditures to counter want and dependency

were keavily weighted by the demands resultinL frcm lcn; S

continued mass unemployment and exhaustion of personal and

commurity resources. This time, of course, was during the

early years of the great depression. Since that time jrac-

tically every American has become either a beneficiary, a S

contrikutoz, or a dependent of a contributor. Laef. 2]

B. SCCIAL INSURANCE IN INDONESIA •

Indonesia, one of the young developing countries with

its own particular scocial and economic problems, has adopted

compulsory social insurance plans. Tne plans are managed by

three government owned1 companies, i.e.

1. FEEUM TASPEN (Perusahaan Umum Tabungan dan Asuransi

Sosial Pegawai Negeri or the Public Company of Savin and

Social Insurance for Government Servants) was established in

1963 with the issuance of Government Regulation No 10. This

'An Indonesian Government Owned Company calledPERUSAHAAN NEGABA,is a corporation in any form wt ose entirecapital is owned by the government. The specification ofEERUSAHAAN NEGARA can be in the form oi"

a. PERUSAHAAN JAT ATAN or PERJAN, a Government ownedcomjany under the ordinance of "Indoneiscge Bedryvenwet"1927. Exp. PERUSAHAAN JAWAIAN KEEETA API (The Failroaa

Com ER UcAHAAN UMUM or PEIU,, a government owned company

under the ordinance of The Government Regulation as 0Substitute Law No. 19, 1960. Exp. PERU,1 ASABRI (The Pui>icCompany of Saving ard Social Insurance for the IndonesianArmed Forces).

c. PERJSAHAAN PERSEEOAN or PERSERO, a corporation inwhich the ;overnment possesses certain shares, while itsleail entity is under the ordinance of the Business iawtook187. .Xp. PI.SEMEN GRESIK (PERSERO) (The GovernmentCorioration of Cement Gresik). [ef. 3]

10

S0 0i

regulaticn zeuires that all persons on government payzcil

automatically become members of tae )rogram. LRef. 4] Its

coverage includes:

a. a saving insurance program,

t. a life insurance program.

2.PEUM ASTEK (EErusahaan Umum Asuransi Sosial Tenaga

Eerja or the Public Company of Social Insurance for

Manpower) was esta£lished in 1977 with the issuance of

Government Regulation No 33. This is a social insurance

jlan for private workers (those who do not work for the

government and are nct likely to become members of two above

menticned social insurance comianies) . PEJUM ASTEK is

managed under the su;ervision of the Department of Manpower

and Liransmigration, and has benefit scuemes covering:

a. a labor accident risk insurance program,

b. mutual saviZg and life insurance programs.

3. PERWM ASABEI (Perusahaan Umum Asuransi Scsial

Angkatan Bersenjata Republik Indonesia or the Public Company

cf Saving and Social Insurance for the Indonesian Armed

Forces) was enacted in 1971. Separated from PERUM IASPZN,

it was established with the issuance of Government

ReguiaticnNo 44. Its intent is to operate a social insur-

ance Elan for military personnel and civilians servin, in

the Department of Defense. LRef. 5] Its coverage is the

same as EEBUM TASPEN:

a. a saving insurance program,

t. a life insurance Erogram.

PERUN ASABBI is managed under the supervision of the

Department of Defense, having the characteristics of

Frovidiny death insurance benefits, besides the gereral

characteristics cf a saving program. Its limited members

and the contribution leing received by the company is a part

of the interesting maragement features.

11

3. Memher ship

A person builds pLotection under the OASDHI prc Lam

tnrougb working in employment covered under various Social

Security related legislation. Coverage is, in general,

compulsary. Contributions on wage and salary workers' earn-

ings up to a statutory maximum each year are withheld and

matched by employers. Self-em-ployed persons pay contritu-

tions on. their annual earnings up to the same maximum as

employees, but at a higher rate. Contributions cf wcrkers

kith more than one employer are withheld and matched up to

the annual aaximum by each employer. Self-employment eazn-

ings of wage and salary workers are taxable only up to the

amount by which their wages are less than the annual maximum

taxable amount. Premiums are paid on a voluntary basis fcr

certain pcrtions of the Medicare program. All contributions

and premiums are credited to the various trust funds that

are the sources of payments for:

a. Monthly benefits when the worker retires, dies,

or becomes disabled

b. Service benefits when eligible aged and disabled

individuals incur hospital cr medical expenses

c. Vocational rehabilitation services wnen

disatility benefits are being received

d. Administrative expenses for each program.

No funds are disbursed for any other purpose.

A number is issued to a person by the Social

Security Administraticn to keep a record of earnings and oi

the benefits based on these earnings. Taxable wages and

self-eminoyment income are reported by employers and self-

employed individuals and credited to the worker's record

under his sccial security numher. [Ref. 12]

25

Longer-range provisicns of the Act were designed to rcvide

insurance benefits icr employees in commerce and industry

that wculd furnish a basic income in old-age retirezent and

during limited periods of involuntary unemployment. Workers

were to pay a small percentage of their earnings up to a

specified ceiling intc a trust fund, and their emplcyezs

were tc contribute an eiual amcunt.

After the passage of the Social SecuriLy Act, the

predcminant emphasis, until recently, has been cn inccme

maintenance rather than poverty elimination. More attention

has been paid to raisiny benefits at the upper income levels

than to making sure tnat the minimum benefits are indeed

adeguate to provide a standard of living above the poverty

lin e.

2. .he OASDHI Picqram

The Olg-Age, Survivors, Disability, and Health

Insurance (OASDHI) Irogram provides monthly benefits to

retired and disabled wcrkers and their spouses dad children

and tc survivors of insured workers. it also provides Health

Insurance tenefits for perscns aged 65 and over, and

starting July 1973, for the disabled under age 65. Gld-age

retirement benefits were provided by the original Scciai

Security Act of 1935, benefits for spouses and children and

survivcrE by the 1939 amendments, benefits for the disabied

hy the 1956 amendments, and benefits for the spouses and

children cf disabled workers by the 1958 amendments. The

1965 amezdments initiated the Health insurance Erogram,

generally known as Medicare. [Ref. 12]

24

The Social Security Act covers a numcer of ircgrams

which have the basic objectives of keeping individuais and

families frcm becoming destitute due to loss of earnin-,s,

protecting cider persons against the expenses of illnesses

that could ctherwise exhaust their savings, keeping fagilies

together, and giving children the opportunity to grcw up in

health and security. These irograms are: [Ref. 11]

a. Retirement insurance

t. Survivors insurance

c. fLisability insurance

d. hospital and medical insurance for the aged

e. Unemployment insurance

f. Public assistance and welfare services:

1) old age assistance

2) Aid to the blind

3) Aid to needy families with children

4) Aid to the permanently and totally disabled

5) Medical assistance

6) Material and child-health services

7) Services for crippled children

8) Child welfare services.

Though the Social Security Act is a Federal law, the federal

Goverrment operates only the first four of the abcve

programs. The other jiograms are operated by the States with

federal cooperation.

7hrcugh the federal-state partnership implemented by

federal grants-in-aid, assistance became available in

February, 1936 under the lederal-state program fcr needy

persons in three groups of the population that in gocd times

as well as tad, have little or no capacity to earn their cwn

living - the aged, the blind, and cnildren deprived of

parental support or care through the death, absence trom the

home, cr physical or mental incapacity of a parent.

23

.. . .

Because the benefits and ccntribution rates may be made

non ccntzactual and flexible, and because the overnzent has

the taxing power, scme risks which are non insurable by

sound private insurance standards are insuranie under sccial

insurance programs. For example, Old-Age, Survivors, and

Uisability Insurance, as it presently exists, could nct be

underwritten by a private insurer, as there are too many

unpredicta-le variables in the program.

Another case in Icint is unemployment insurance, which

is not underwritten ty private commercial insurers because

they consider the chance of loss to be unpredictable and the

exposure units to be interdependent. However, some emplcyers

have developed self-insured unemployment "insurance" plans.

D. SCCIAl SECURITY I THE UNITED STATES

1. The Social Security Act 1935

She Social Security Act was passed by Congress and

became law cn August 14, 1935. It was launched during the

great depression and was conceived then as a kind of social

insurance. Although never intended to be subject to the

strict actuarial standards used by rivate insurance

programs - in which accumulated premiums are invested, indi-

vidually accounted for, and contractually related on the

basis of eguit " earned to the benefits later payable - the

original old age and survivors social security plan, never-

theless, was seen as a modified form of that concept.

[Ref. 10: In general, social security has two major ctjec-

tives whose relative importance has changed from time to

time. First is the elimination of poverty through provision

of some sinimum income. Second is assurance of the mainte-

nance cf some specified fraction of previous incomes in the

event there should ke an interruption or loss of earning

power.

22

* - .t . -

1. Participation is compulsory for all eligible I-ersons.

Ctherwise scme individuals would elect to be covered and the

Folicy cjective of a floor of protection for all members of

a defized group would be thwarted.

2. he benefits are prescribed by law. There are no

contracts, and it is possible (but highly improbable) that

the government will rescind the benefits in the future. P

Periodic changes in the benefit structure are very likely

through changes in the law.

3. The system redistributes income in addition to

providing Erotection through a pooling arrangement. The P

lower income groups, the insureds with many dependents, and

the jarticiiants who were elderly when the system was inau-

gurated receive more benefits for their contributions than

most other participants. If this were not true, it would be P

impossible to achieve the public policy objective of a floor

of protection for all participants, since some insureds

would be unable to afford adequate protection. The benefits

are not equitable in the private insurance sense, tut they .

are nct meant to be. Other standards ol performance have

teen deemed more important.

7be contribution rates are scheduled, but the government

may and has revised the schedule periodically. Consequently, "

bankruptcy is impossible as long as the government has an

effective taxing power, although it is conceivable that the

taxes may become unbearable. An individual's contribution

may vary yearly even though the tax rate remains fixed, for

the Lase (annual inccme) upon whica the tax is levied may

fluctuate from year to year. The fluctuations may have

little or no effect cn the benefits.

4. The governmert system is a monopolistic system.

However, jublic pressure forces a continual reassessment of

tenefits and contribution rates.

21

. .

compulsicn, to give organization, or to supply other ingre-

dients in a successsful insurance formula. Social insurance

has a lasic purpose of providing a certain degree of

econcuic security tc members of a societi against risks

which are beyond the control of either the individual or a

group of private individuals organized for mutual protection

by a private insurance company. Neither private agencies

nor the irdividual were able ccmpletely to meet successfully

the various problems leading to old-age dependency, ill

health, cr unemployment. In an industrialized economy,

these Ercblems are essentially beyond the power of any indi-

vidual tc solve. It is no longer accepted reasoning, for

example, that an individual is solely to blame for his unem-

pioyment and should tear the entire cost himself. It is also

recognized that it may be beyond the power of the individual

to provide completely for his own old age because cf the

nature of the economy in which he earns his living.

Social insurance has the further purpose of hel-ing to

stabilize the economy in various ways and to maintain a full

employment level. Unemployment insurance benefits, for

example, have a reccgnized stabilizing effect in pericds of

recession. If an emiloyee without savings loses his jck, he

does not have to go cr relief roles immediately, but perhaps

may only find it necessary to reduce nis standard of living

temkcrarily until a new job is found. If a community's main

source cf employment is cut off, the blow to business

activity is thus softened, although a new source of employ-

ment must be found tc replace that which was lost. Hence,

social insurance will include all insurance arrangements in

which the government acts as the insurer, subsidizes the

operatior, or requires the insureds to purchase protection.

Social insurance differs from the most common forms of

private insurance in four important respects: [Ref. 9)

20

The purpcse of social insurance is then to prevent economic

insecurity by pcoiing the ccntributions paid by covered

earners and their employers to provide protection against

the lcss of earned income for a portion of the irsureds.

The social insurance plans tend to be introduced when-

ever a sccial Eroblem exists which requires governmental

action fcr solution and where insurance methods are deemed

most apxropriate as a solution.

A social problem is a condition or set of circumstances

that society, as a whcle, finds repugnant or otherwise unde-

sirable, and for which the solutions are generally beycnd

the ccntrcl of the individual. Examples are the prctlems of

crime, poverty, uneaployment, mental disease, ill health,

dependency cf children or aged persons, economic privation

of a certain class such as agricultural workers, drug

addicts, industrial accident victims, and divorcees and

their fazilies. Insurance is not an appropriate methcd of

soluticn fcr many of these problems since the peril is not

accidental, fortuitous, or predictable. In other instances

insurance is perhaps feasible, but due to tne catastrophic

nature of the event (as in unem loyment), private insurers

cannot undertake the underwriting task because of lack of

financial capacity. Ihis means tnat if the insurance method

is tc be used as a sclution for certain problems, govern-

mental agencies must either administer or finance the insur-

ance plan.

7he justification for social insurance, then, lies in

the fact that some insurance tasks either cannot or are not

accomplished by private insurers without assistance from the

government. These tasks concern social problems which are

deemed tco important to ignore. 'Ref. 8]

The economic prcklems involved in social insurance are

such that governmental action is necessary to solve legal

difficulties, to supplement financing, to introduce

19 . i

............................. .]

TABLE I

Division of the Insurance Business

Private Insurance

fire Casuall Ifire Accident and sickness

Eztended coverages Automobile insurance

Business interrultion Workmen's compensation

Related lines such as Liabiiity coveragessp rinkler leakage--,water damlae,etc Burglaryrobbery,and tneft

Glass

Power plant

Credit

Marine Suretysni£

Ccean Marine: Fidelity

Cargc Surety

Hull Forgery

freightl iabil ity _ _e"--

Inland marine:

Irans Eozta tion LifeInstrumentalities of Annuitiestzansporta tionProperty floaters Accident and sickness

Bailee coverages

Social Insurance

Federal Government State Government

cld age, survivors, and Workmen's compensationdisatility insurarceprogzam Unemployment

Miscellaneous prcgrams, Accident & sickness programsuch as war damaceinsurance, etc Miscellaneous programs

18

B. FLIVATE INSURANCE

The classification of insurance into private and social

insurances, can alsc be distinguished through its coverages

(Table I) The private insurance coverages are generally

divided into three maor types

1. Fire and marine

2. Casualty and surety

3. life

Private insurance flans generally possess the following

characteristics: [Ref. 9]

1. The protection is voluntary, insureds must be scld on

the need fcr protection. As a result, some persons tuy

either no irotection or inadejuate protection, and they

retain their freedom of economic choice.

2. he insurance contract is a legal instrument which

cannot ke changed and which can be enforced in the courts.

3. The cost of each individual's protection is deter-

mined on an actuarial basis. His benefit amounts and his

loss and expense producing potentialities are considered in

determining the price, for the price of the protection

sho-uld egual the expected cost.

4. 7he protection is provided by many insurers of

various types who ccmpete with one another for insureds.

Competition forces tke insurers to reassess their contracts

and prices periodically.

C. 7EI SCCIAL INSURANCE

The Comlittee on Social Insurance Terminology offers the

following definition of social insurance:

B!

A device for Eoolirg of risks bi their transfer to anorganization, usually governmental, that is re-uired bylaw to provide pecuniary or service benefits ic cr onbehalf ol covere peFrsons upcn the occurance of certainpredesignated losses. [Ref. 8]

17

enough to contemplate various tyles of social insurance. The

definiticn also refers to insurance as an economic institu-

tion, while its legal status is not important, since it can

-e a chartered insurance company, a private corporation, a

group of associated individuals cooperating in an insurance

venture informally, cr a governmental agency. It also refers -

to "accidendal losses", because losses which are certain to

cccur are not insurable.

An insurable risk should possess the following charac-

teristics :

1. The number of insureds should be large and should be

independently exposed to the potential loss, otherhisE the

risk is not reduced sufficiently to permit safe operation.

2. The losses covered should be definite in time and

place to facilitate loss adjustments.

3. The chance of loss should be measurable, otherwise

the cost of the Frogzam is indefinite.4. The loss should be accidental from the viewpoint of

the insured. It is unwise to insure against losses which

the insured can bring about or against losses which are

hound to happen. Death, for example,is bound to happen, hut

the date of death is uncertain. [Ref. 8]

Insurance is often referred to as an intangible since

the pclicy holder receives in essence a piece of paier

rather than a physical product. Because of the fact that

the henefits of insurance oftel lie in the future, eople

tend to put off taking out the necessary insurance in favor

cf purchasing articles which can be enjoyed immediately. For

this reason, insurarce companies have generally found it

necessary tc employ agents to sell their products to the

public. 1 he purpose cf the agent is to explain policies to

the putlic and attempt to convince potential clients tnat

they will benefit frcs the purchase of insurance.

16

. . . . . .. ..i

benefits of pecuniary value upon another party, hereincalled the insured or beneficiarl, dependent upon thehappening of fortuitous event in whicn the insured orbeneficiary has, cz is expected to have at the time ofthis happenin - of such event. A fortuitous event is anyoccurarce or ?ailure to occur which is, or is assumed bythe parties to be, to a substantial extent beyond thecontrol cf either pazty. [Bef. 1)

From a social standpoint, insurance may be observed as a

method of combining a large enouga group of units to make

the lcss predictable. This method enables the individual to

obtain irsurance at a reasonakle rate and thus to protect

himself against the possibility of disastrous losses.

Fzom the standpoint of an accountant, insurance may be

defined as a method of substituting a small certain loss ior

a large uncertain loss. The individual suffers a mcnetary

loss by paying a small premium which he otherwise would not

have to pay. In return, however, protection against the

possitility of a large loss will be obtained. The loss, of

course, may or may not occur.

Greene offered a definition of insurance, which covered

two major ccntexts

1. as a legal contract, and

2. as a social or economic institution designed to

perform certain functions, as follows:

Insurance is an eccnomic institution that reduces riskby combining under cne management a group of objects sosituated that the aqreqate accidental losses to whic-the qrcup is subject beccme predictable within narrowlimits. It is usually effected by, and can be said tcinclude certain legal contracts under which the insurerfor consideration, promises to reimburse the insured orrender services in case of certain described accidentallosses suffered during the term of the agreement.[Ref. 83

7bis definition stresses how the main economic function

performed by insurance, namely, risk reduction is acccm-

pished. 7he word 'sually" is to imply that not all insur-

ance is effected by zeans of a legal contract. This is troad

15. . ... . -

:.'.--'''" ' ' '"' "'-'-" . . . ... ."i -"L ,. .', . - . . .t . . .. . . , r. - ._ . . . .

II. IBSUEANCE: PRIVATE INSUBAJCE AND SOCIAL INSURANCE 0

A. INSUBANCE AND ITS DEFINITION

Cac cf the greatest problems that people face in life is

the dan~ez of loss or injury. It manifests itself in various

forms such as disease, disability, death, unemployment,

fire, natural disaster, political chaos, war and all the

rest of an endless list. She danger comes to life uncer-

tainly so that everybody bears a certain risk, thus creating

a feeling of insecurity. People have steadily sought ways

and means of avciding the threat of unexpected injury to

themselves cr others which results from the existence of

these many risks. Insurance is the most universal and prcb-

ably tie soundest scheme for avoiding or transfering risk

that has as yet been devised. [Ref. 7] The major value of

insurance is that it enables policy holders to eliminate -

constant worry about the loss of their possessions cr their

health. To most pecple, uncertainty and insecurity are a

type of mental pain. Peace of mind may therefore be ccnsid-

ered an intangible berefit provided by insurance.

Insurance may be defined in many ways depending upon the

standpoint from which it is viewed. LRef. 1] From the legalstandpoint, insurance is a contract whereby the insurance

company agrees to make payments to a party, should the event

insured against in the contract occur. Thus insurance may be

looked upon as a series of contracts whereby the insurance

company agrees to indemnify the insured against certain

losses.

The New York Insurance Law defines insurance as follows:

The term insurance contract shall be deemed to ircludEany agreezent or other transaction whereby one party,herein called the insurer, is obligated tc confer

14

the insurance company using tLe resent value method. The

result of the comparison is not the ansolute fairness meas-

urement, since PEROM ASABRI also bedrs other obligaticns

which shculd be taken into consideration.

The methodology used in my thesis is by:

a. Acguiring pertinent information on some cf the

company's major protlems through personal intervieus with

some ccmpany officials.

b. Using the tenefit schemes rrovided by the companj

in their publication titled Petunjuk untuk Mendapatkan

Santunan ASABRI. fRet. 6)

c. Hypothecizing and documenting what a career

officer uould contritute to and gain from being a member of

the insurance program using the present value method

0J discussed in section C of Chapter IV.

Chapter II discusses the nature of insurance, particu-larly the social insurance and its practice, which, in the

United States, is known as social security.

Chapter III discusses the nature of the social insurance

system icr military personnel in Indonesia.

-Chapter IV shows the structure of the present value

model, along with scme assumptions and simplificaticn it

assumes.

Chapter V will apply the present value model tc the

current ASAERI benefits scheme to evaluate its fairness.

13

C. 7EE ISSUES

Realizing the fact that PEEUM ASABRI is still very

young, and the benefit scales have neen reassessed many

times to meet the "fairness" of the comensation, freguent

questions asked by members are: What is the criteria of

fairness that is used to calculate the benefit amount? Is

the ccmpany's ability to pay the benefits the single consid-

eraticn in determinitg benefit amounts? Members argue that

money today is worth more than it will be tomorrow, espe-

cially because of tie nigh inflation and interest rates.

They always think in term of savinj their money rather tban

contributing it to a social insurance program. No one will

argue against the mandate of the social insurance Ercgram,

since tie contribution they made in the form of salary

deductior is ccnsideiEd reasonable. What is at issue is the

guestion of fairness of the benefits amount in ccm;arison

with the ccmpulsory ccntributions made.

Another question being raised is whether PERUM ASABRI

will ever go bankrupt or find itself in a deficit situation

due tc tie shrinkage of funds. Such a situation has befailen

the sccial security 1rogram in the United States. If this

problem exists, then a careful actuarial calculation with a

sufficient safe cushion should be made in setting uE the

formula tc calculate the necessar benefit amount.

D. 7BE BETBODOLOGY

One method in measuring the fairness of a savings insur-

ance irogram is by comparing the present value of both the

coatrikution being paid every month, witn the benefit amount

that %ould be received by the beneficiary later on. This

compariscn should rEflect a measure of fairness. The

purpcse cf this thesis is tc analyze the fairness of the

benefit irovided by EIBUM ASABEI to both the teneliciary and

12

4. 7rust Funds

funds nct withdrawn for current cash or service

benefits, the financial interchange, and adinistrative

expenses are invested in interest-bearin Federal securi-

ties, as required by law; the interest earned is also depos-

ited in the trust funds.

There are four separate accounts in the United States

Treasury, in which tie equivalent of taxes received are

deposited under the Federal Insurance Contributions Act, the

Self-Emzicyzent Contribution Act, and contributicns under

secticn 218 of the Social Security Act dealing with cCverage

of State and local gcvernment empAoyees. In addition, any

sums received under the financial interchange with the rail-

* road retirement acccunt; voluntary hospital and medical

insurance premiums and transfers of Federal general revenues

are also dcEosited in these accounts. These four accounts

are:

a. old-age and survivors insurance (OASI).- The

trust fund used fcr paying monthly cash benefits to

retired-worker (old-age) beneficiaries and their dependents

and tc stirvivors of insured workers.

1. Disability insurance (DI) .- The trust fund used

for paying monthly cash benezits to disabled-worker benefi-

ciaries and their dependents and for providing rehailita-

tion services to the disabled.

* c. Hospital Insurance (Hi).- The trust fund used for

paying part of the costs of inpatient hospital services and

related posthospital care for aged and disauled individuals

who meet the eligibility reguirements.

*d. Supplementary medical insurance (SrI).- The trust

fund used for paying part cf the costs of physicians'

services, cutpatient hospital services, and other related

medical ard health services for voluntarily insured aged and

* disabled individuals. LRef. 13]

26

- . a -..o t - . . °

5. Cash Benefits

Monthl i cash benefits under OASDHI are ;aid as a

matter of earned right to wcrkers wno yain insured status

and tc eligible dependents and survivors of such workers.

Fully insured status qualifies a worker and his family for

almost all benefit types on the basis of his social security

earnings credits. A worker who dies without being fully

insured may be currently insured, and his children and their

widowed mother would thus jualify for benefits. "Insured in

event cf disability" status is reguired to qualify for a

disakled-worker benefit or to establish a pericd of

disability. A lump-sum payment is also payable on the death

of a fully cr currently insured worker. Certain persons aged

72 and over who do not meet the insured-status reguirements

can qualify for small fixed-rate oenefits under special

transiticnal provisicns.

Cash benefits are financed through contributions

from wa es and salaries and self-employment income (except

for transfer of Federal general revenues to finance military

and cther gratuitous wage credits and 'special' benefits).

The cash benefit pxcgram is administered by the Fedezal

Goverrment; there is no participation by private insurance

companies cr private pension plans. [Ref. 12]

This chapter was intended to serve as ic ;int of

comment information about social insurance as it exists in

the United States. The next chapter will concern itself with

the directicn that social insurance has taken in Indonesia

with em;hasis on social insurance for the zilitary

perscnnel.

0

27

. . . . . . . . . . . .

III. SOCIAL INSURANCE SYSTEL EO THE MILITARY PERSONNEl IN

INDCNESIA

A. S CIAL INSURANCE IN INDONESIA

In a developing ccuntry such as Indonesia, the rcle of

compulsory insurance i.e. socidl insurance, as an economic

institution is very important both for individuais as well

as for tie whole cosaunity as an entity. First, it will

provide protection for the individuals, such as in cld-age

pensicn, health, sickness, death and labor accident insur-

ance, which will give a feeling of security and welfare for

the eizlcyees or workers as well as their dependents, a

condition tasically needed to increase personal Ercduc-

tivity. Second, it will supiort and enhance the national

develoiment program, since the contribution gathered from

the members as premiun bj the insurance company is a fcrm of

compulsory saving from the society, creating a pctential

domestic carital formation for the whole economic system.

Realizing the fact that people are not insurance minded

and aware enough of the benefits, while they have to be

Frotected, the Goverrient of Indonesia designed a compulscry

social insurance for the purpose of the continuation of the

program, for each group of people in the society:the

civilian servants, the military personnel, and those who 0

don't work for the gcvernment.

In ccmfazison with the social security program in the

United StatEs which covers various other kinds of beneiit

catagcries such as, the social insurance, public assistance,

and welfare prcgrais, the social insurance program in

Indonesia today covers only the first catagory just

menticned.

28

* S

.L - - L .. . ' -- , . T . I, L . L L LL < - , .T' . I T ~ l . . . [-- ~ ' % .%g - -- L . ". -+4

L i L [' '' L L " . . l "( ' 'I (

B. SCCIAL INSURANCE FOR THE MILITARY PERSONNEL IN INDONESIA

1. Consideratiors and Misions

5cme of the isportant consideration in estatlishing

PERUM ASABEI separate from PEEUM TASPEN are as follous:

a. The systez will guarantee better management and

control (military way) so that they could provide better

benefits and faster service to the beneficiaries, since most

of the key positicrs could be assumed by ex-military

personnel, who undoubtedly still possess their own interEst,

furthermore , the coalany's policy could still be controlled

by the Department of refense. This is an important feature

in accordance with the policy of giving better soldier

welfare and maintaining high morale.

t. The system will provide a prospective opportunit]

for the retired military personnel wao would like to take

the jot in this company with all its side activities.

The main missions of PERUM ASABRI are:

a. to pay all the benefits claim to the members or

the survivcrs as soon the benefit is claimed as possible.

t. to prepare and assess an actuarial calculaticn to

determine the feasible amount of benefits according tc its

current financial ability.

c. to manage the contribution funds being collected

from memters in such a way as to providing ever-increasing

amounts cf benefits icssible.

2. The Actuarial Calculation

7he actuarial calculation for a social insurance

program can be determined using two dilferent airoaches,

namely:

a. The prospective approach which, based on the

existing fund, deteimines the kinds and amount of the

29

tenefits which will te given to the beneficiaries in the

future.

i. The retrospective apiroach, which is to detezmine

in advance the kinds and amount of the benefits to te given

in the future, from %hich a calculation is derived tc find

the necessary amount of fund that should be provided in the

present time.

EEBUS ASABRI is using the prospective approach

because it is considered safe and simple. In this relation

the azount cf the benefits which can be given to the current

members as well as the future ones mainli depends upon the

amount of funds which can be provided at present for that

purpose. _ecause cf this adorted approach, providinggenerous funds at present becomes one of the most iopcrtant

program for the compary. [Ref. 14] 9

The government regulation states that the membershie

for EIRUB ASABRI is compulsory for all military kerscnnel

and civilian working in DOD, while the contribution is regu-

lated by the Presidential Decision No 56, 1974, which states 5

that 10% cf the gross salary should be contributed to the

program to be distributed as follows: LRef. 15]

a. 4.75% for retirement insurance

k. 2.00% for health insurance

c. -.25% for social insurance

This contribution is withheld and transfered into PERUM

ASABBI. In practice since 1976 PERUM ASABRI has always

received in advance the money from DOD, as large as 3.25% of

80% from the approved personnel payroll budget, for each of

the inccing budget year. This is based on past experience,

that the budget proicsal by LOD is always higher than the

actual payrcll, so tie rest will be reconciled at the end of

the budyct year based on the real personnel payroll. It does

not mean that the rest is always 201 of the aprroved payrcil

3

30 -

S

tudget. Icst of the time it is zero. [Ref. 16] This finan-

cial arrangement, thcugh, is considered very favorat1E for

the ccmpany, since they can develop the fund vastly in what-

ever way they decide. With a secure inflow like that, the

company car set a program and manage the unused funds in the

most cptinal manner, and in the most profitable and secure

uay pcssible.

Considering that the members contribute 3.25% from

their grcss salary every month, within 30 montns they will

have paid a contribution as large as 100% of the mcnthly

gross salary. Assuming other things remain constant, namely

no changes in pay rate and the contribution, in every ctier

30 months the benefits scale should be fairly increased by

at least one month of take home pay, even if the interest

factor were ignored.

3. 'he Current Investment Polic"

a. The Sources of the Investment Funds

1) The sources of the funds available to be invested

are the coztribution from the members collected through DCD,

in additicn to the returns from existing investment.

2) The amount of the contribution received from the

memters are:

a) 1.25% of gross pay, wheL ASABRI was first

estatlisted in 1971.

k) 3.25% of gross pay, since 1975

b. The Principles of Investment Policy

1) from the time PERUM ASABRI was established, they

have tc tear obligation to pay the benefits to the members

who have retired since August 1, 1971 and to those who

retired tefore then lut have not received the benefits from

PERUM 7ASPEN.

311

2) tJ.on its establishment, the funds being acquired

by PEBEU ASABRI amounted to Rp.339.824.968,54 consisting of:

a) The cash value from PERUM IASP.N S

= Rp.109.824.968,54

b) Apprcriations from Directorate General of

Budgetting = Rp.230.000.CC,O0-

Iotal = Rp.339.624.968,54 S

3) Considering the limited amount of funds that

could be accumulated at that time relative to the obliga-

tions to be fulfilled, from the early days the investment

policy was directed toward the investment type that can meet

the fcllcwing corditicns:

a) Quick yielding investment, meaning a shcrt

term investient

b) Liguid, meaning that the investment can be

transferEd to monetary form instantly

c) Low possible risk

d) Giving return of investment at least to cover

its c[erating expenses.

4) The ccmpany avoids the sort of investment bearinj

speculative factors. On the other hand, they realize that

such preiered investment with those prime gualificaticns S

would te limited in existence and giving a lower return

compared to some riskier type of investment.

5) In a further develcpment, the investment pclic.,

should be in accordance with the directions designated by

the financial Minister's Decision No.351/MK/IV/1975 dated

April 7, 1975 regarding the funds to be invested by the life

insurance ccmpany in Indonesia, which can be planted only in

the field of: IRef. 17]

a) Time Deiosits

t) Land and Building

c) 1ortgage

32

*~~.; '

d) Policy Ican

e) Bonds and Securities.

Nevertheless, the princiile policy on investment

being aiiiied so far is the safety of the investment itself,

because all the funds being invested along with all their

returns kelcng to the members, which should be paid back at

a later time as a benefits scheme.

c. Based on the above arguments, the forms and tyies

of investment currently being aplied are:

1) The time deposit becomes tze type of investment

being widely aeplied since the early times, because this is

the cnlj type that meet both requirement wenticned in

subsecticn 3.b.3) and 5).

2) Guided by the Financial Minister's Decision, the

mortgage loan transaction sporadicaiiy had been applied with

the third parties, where PEROM ASABRI could obtain fixed

returns hhich were higher compared with the time deposits

rate available at that time.

3) Besides thcse discussed above, investment in the

form cf tuying lands was also made. Land investment dces'nt

give mcnthly returns, but the ever increasing land price

gives the -romise of a one-time big profit whenever teing

resold at a later time.

4) Starting in mid 1978, investment prograr in

buying promissorl notes which were issued by monetary insti-

tuticns ether than tanks were developed with the following

consideraticns:

a) The prcmissory notes' rate of interest is

higher tkar the time deposits.

h) The characteristics of the time deposits can

he found in promissory notes.

c) The prcmissory notes can meet the short term

liquidity demand, since the period of time can be arranged

between a week and three months.

33

5) In accordance with the issuance of the Finarcial

Minister's Decision Nc 313/MK/VII/1979 aated July 13, 1979

whereas PEEUM ASABRI was stated as a legal entity eligible

as a purchaser in the stock market, the company had tried to

diversify its funds through the stock market starting in

December 1979 with the following considerations:

a) Adapting the principle of spreading the risk

in investment.

b) Buying stocks, besides earning dividend, also

gives the opportunity for hedging against inflation because

cf the Ecssibility in capital Gain whenever being rescid.

c) The government regulation related to the stock

market tends to protect the investors' interest, sc that

investing funds through stock market is fairly safe.

As a follow ul of investing funds through the stock

market PEBUM ASAERI has been purchasing and reselling stocks

of the ccmpanies having gone public. At the present time, in

addition tc stocks, the certificate of PT.DANAREKSA and

bonds issued by the government-owned companies or joint

private and government company are also available in the

market.

4. 'he Investment Returns

a. Rate of Return.

7he investmert returns which could be acquired by

PERUM ASABEI from the above mentioned investments were basi-

cally determined by the rate of returns provided by the

related investment outlets. In otner words, the rate of

returns that can be cbtained is given, meaning that FEFUM

ASABBI and cther investors in general can not influence the

rate because the rate mechanism is determined mainly by the

government through its official banks.

34

-. 4 . -- . . i - . . . 4 *

b. lime Deposits Offered by Government and Private

National Earks.

1) From the time PEIUL ASABRI was established in

1971 until May 1983, the rate ci interest from time deicsits

in goveirment banks had declinea drastically as shown in

Table II

TABLE II

The Rate of Interest of the Government Banks

_ _ejosit Period 1S71 12-28-74 1-13-77 Until May 83

214 Mcnths 305 245 18% 12%

lE mcnths 245 215 - -

12 Mcnths 18% 15% 12% 9%I Mcnths 151 12% 9% 6%

Mcnths 125 95 6% 3%

A±ter the new banking policy was announced on May

31, 1983, the deposit rate of interest at the government

tanks tended to follcw the deposit rate of interest at the

private national banks. To what extend this tendency would

go can nct be anticipated. In fact, until about the middle

cf 1S76 PEEWU ASABKI could not enjoy the high rate of

interest frcm the time deposit of 18 and 24 months, because

the funds available at that time could only be deposited for

the maximum pericd of 12 months. Tnis was because of the

follcwing reasons:

- The ccntributicrs were transfered from DOD cnce in

three months, and scietimes even delayed, which means mostof the funds could be only possible deposited for the period

35

of 3 to 12 months ccnsidering they should be acting as the

liquidity bumper for the vacant months.

- Nith the contribution of only 1.25S from the take-home

Fay, the funds being gathered was relatively small, so that

almost inpossible to deposit them in period of more than 12

months. Accordingly the rate of interest being enjoyed

between 1971-1975 was between 9%-185 per year.

2) In accordance with the letter of the Chief of

Staff, DOG for Adlinistration No B/550/II/I/SIN dated

february 6, 1981 to make a trial investment for the iunds in

tonafide private naticnal banks, PERUM ASABRI was encouraged

to deFposit its funds in selected private national banks.

The interest rate in private national banks between 1980 and

1983 was stable enough, varying between 18%-18. 5% for the

deposit period of 12 oonths. This interest was more atrac-

tive ccmiared with the rate in the government banks bearing

cnly S% for the similar period of dejosit.

c. The Rate of Interest ci Promissorj Notes.

The utilization of the funds through promisscry

notes and non banking institution began from middle cf 1978.

The interest rate of Eromissory notes sometimes bear a wide

fluctuation, because they form as an instrument in money

market fcr the short period of time, for the maximum of six

months. Accordingly the interest rate was determined at the

time the notes were purchased using existing market-rate.

Nevertheless, within the last three years, until

March 19E3 (just befcre the rupiah devaiuation) the average

interest rate of proxissory notes varied between 17-191 for

the three mcnth-pericd. This means that until March 1983,

the interest rate of promissory notes was much higher than

the interest on those provided by the private rational

tanks. Considering the characteristics of promissory notes

as a short period outlet, the utilization of funds through

3

36

I

this instrument will also meet the very short liquidity

demand.

d. Securities.

1) Marketable Securities. Income from tne pcsses-

sion cf securities kncwn as dividend usuaily ccurred twice a

year. lie amount of the dividend is not fixed, de~ending

upon :

- the aacunt of prcfit being obtained by related ccrpora-

tion.

- the iay-out ratio, the corporate policy in determining

the icrticn of net income distributed to the shareholders as

dividend.

This is fully understandable, since each company has

different pclicy in planning their future program.

TABLE III

The Bate cf Dividend given by 13 Corporations

- Semen Cibinong 14.90- P.T. Centex 25.755- E.A.T. Indonesia 13.54- Iificc 17.40- Richardson Vicks Indonesia 20.44%- Good Year Indonesia 10.88X- Merck Indcresia 17.62- Unilever Indonesia 16.77%- Multi Bintang 14.o4%

Eata 18.03%- Unitex 12.00- ayer Indcresia 17.35%

- Sucaco 11.81%

The yearly average rate oi dividends given by the 13

different corporaticns which already went public are as

shown in Tatle III

37

. . . -'- " . ." ... '. .- . .. . . ...

.. . .. . . . .,. , . .. ,, . , . , -.- : -.• " ' . ' ' . '. :- -L:Z ' ''' '' -'-- .k.a .. .. . ." " . , • ' " J

Those kercentages of course, would Le smaller if the shares

were bought from sEccndary rarker, since the secondary

market usually cffered a higher price compared with the

primary market. As a result, in addition to that tenetit,

if they sold these marketable securities through the sEccn-

dary zarket, they wculd obtain capital gains, that is the

positive difference between the purchasing price and the

selling price.

2) Ihe certificate of PT DANAREKSA. PT DANAREiKSA is

a government owned ccapany based on Government Regulaticn No

25, 1S=76 and the Presidential Decision No 52, 1976 with its

missicn of purchasing marketable securities of the coing

public ccrpcraticn fzcm the primary market for the purpose

cf making profit and stimulating the capital market, and

later selling certificates to public so that the public

could also enjoy the distributed profit being obtained.

The certificate of ET DANAREKSA consists of two

kinds:

- Certificates which are suiported by sin ,le

corporation securities, such as the certificate for PT SEMEN

CIBINCNG securities, cr certificate for PT B.A.T. etc.

- Certificates which are supported by multille

corpcration securities or prcmissory notes.

The certificate of PT LANAREKSA appears to be a very

liquid outlet of investment, since PT DANAREKSA guarantees

to repurchase those certificate anytime, which in practice

can be dcne either by PT DANAREKSA or the government hanks

as its agents, with the price Leing announced every week

with the warranty of at least as its nominal price. Until

now each series of the certificate gives the dividend of 2 x

ip.90C, cr ip. 1800, a year, whicL means be.iring an interest

I

rate cf 18% from its rcminal irice.

38

I

e. Bonds.

Since Fetruary 1983 the Indonesian capital market

has been crowded by the bond emission of PT JASA MARGA,

followed by tae bonds of BAPINDO in March 1983 and the bonds

cf PT PAIAN SEJAHTERA in June 1983. Different from securi-

ties that provide varying amount of dividend, bonds give a

fixed interest until their maturity date. All above

menticned bonds have a 5-year period with a similar fixed

interest of 15.5% a year.

f. Cther outlets.

1he developmert of funds through mortgage and credit

loan being done so far has been giving interest rate as it

is apilicatle in the spot market, i.e around 18% a year.

5. 7he Compositicn of the Invested Funds

Until 1977, about 907 of the invested funds were in

the form of time depcsits at goverLment banks. only a small

porticn were invested on land and mortgage with a third

party.

Since the middle of 1978, investment in promissory

notes started. Since the end of 1979, investment in capital

market begun. And since 1981, until September 1982, the

investment in time deposits tnrough the private national

banks was also being done.

from the cozpositicn of the invested funds since

1975 until now, it can be observed that time deposits are

tne ma~cz dominant irvesting outlet of PERUM ASABRI. From

the overall outlook, almost 977 from all the investihle

funds were planted in the form of current investment, i.e

time deicsits, promissory notes, marketable securities, and

mortgage with the third party.

39

Having comileted our discussion of the finarcial

positior of PERUM ASAERI, and all benefits rovided by the

company, the analyses of the Leneiit system will depart from

those aLcvE discussicn. The next chapter will introduce the

present value model as a method to be used 2or calculating

the contribution paid and the benefits received by the

members.

53

I I I

A .0 Q I

0 I -4 Q) =

0 4J.4(0 1I 4J(n*H.4J+J I

I w I )4 i

410 i .l a) 1) clI I

I I I

I II N I

,, INI 000o H,• ,-I I.,4 I"C3 I J I

1-I o -- H-.I

c-) I I","4 I I I 1

W I I I I 02.1

I 0P4 u I I

4 -- 1. -11-1 01 r-..

1W11p I

C3

w I D N NOIn I' 0 0I I

E=I .4rO 00I-1

I I- g 0 1Z r ' I

I I I . I 1

I IW I I L~4II 4 I'D 1- 11 1 I

t- r- .

Leath Risk Insurance and Burial C omiensation

Benefits (Table IX):

This table shows the develoiment of tne ccmpanA's

policy in providing the Death Risk Insurance and the Burial

Compensation Benefits.

- Formerly, hhen a member died, the dependent will

obtain DEI and BCB a, the amount zor the respective rank, in

the table. The death could happen either within his active

or retirement period.

- later, since 1 April, 1977 the Death Risk

Insurance Benefit was only given to the member who died

before terminate from work. DRI is combined witn the Cash

Value Benefit.

The Burial Ccmpensation Benefit then is given to

members who died in his retirement status (Table X). Hence,

this proGram is given combinedly with the lump-sum payment

benefit, which is given to the members who are survival and

get retired.

51

j I IP

I I fl- 1) -4~ a ULf W'"~1-4- .11 -4-10. w r- ,-~ 'A M

I I o H -0 (W I H ',4 - J-I I NM 0 .- 4fl'- I HN 0 a I

41I I (n I J =WNI J 4

Iw N q w Q l (

1 A. 1 410w W- w 4 1O

I U I :4 J-F 1 -

HI % ' % I- %

I 9coa 1n~a

od H

_ _ IL 110 1

CD0COC 0C)Ocnc-* 04J~4 '4 (4-UM"41

CIPD X Innn~~ I x I4>4>

PC I I 4Ww

I D 4- UI )Hl I WrIUvI LL44r Q) UHI- lq I In 4-4a I

I I r4-. H - El -rI "I44 31 04 rI 4E I

.&J 9-1 IW J 0 4 4 I W tnW 4L41 0 0;1(n 0 u I (D NO P I I

9Ls I r(N-l4- Zn9H4 I -M I19301 r . -9 QJ- 1 H 9 4 J 44

n- L4 04 r on N I WC4N WU) ~

~rn L-

9 -- - - - - - --N%. ~ ~ z Lo ,

Cash Value Benefit (Talle VII and VIII):

7his benefit is designed Zor taose who.

1. lerminate wcrk from the service without having the

right c¢ retirement ilan.

2. lerminate work because of death while in active

duty.

Beassessment have been made many times to meet the

fair value of the benefit for the members terminating from

the service. The reassessment is also important to te in

harmony with the change being made for the lume-sum jayment

tenefit.

Some vdriables in the formula are being used tc make

a reasonable calculation. Those are:

a = the annuity, the amount ot contribution keing

paid

x = the age of member when assumed the membershiE

n = the contritution period being done

m = the pericd between x and the minimal age of -

having the right cf retirement plan according to each

member's group in rark.

49

. . . . .-... . - . .... -

wS

S1-4 0 44 I 0 14 I

I 0 0 I 0 0. 1 . 0 II1 >q.J I ). I >4

T wI. =,a Q) Wd OT 1 :0 w 0 IIb I '04-4 1 1-044to 1 -4 04-4 10

I m 1 0 rOI c I OD40 ivti I M~ON g- vtI. I I W-.4 I W+J.'- 4- 1 00I sOJ4J".-

14J 00- J 4E3 g I 4 J.E I4.) 1 4. j l 4$NI04q HQ I C 4r) II A 4 1 l Ww -

41 Pe I W-.4 T I Do- W-UQ 4 1 P W-93 wI 4% ?l4.14) ElAw I NDM4 I~ -I- 4J 6 3t

U =. I r- Q ) w a I (NOa) W. I LnO 04

0401 84N 4 1- 1 4 04 4 I 04J0 J4J(

.1 4r E t I7 1 -4O El M W'17 I *409 M > W IC

mC I~ J'11

.-4 11 0 W4I a4I a-

-4IE 9(dOU 0I

'.4 T _ Q_ _ _ _ w

mw.I I en 0 Ln I CL). -

0 34 % 1 1 :r6448-h

x (n x >

I~ I4.-4 H 44 000 0 OJ 4 .jrsv 0 1114.L I4 14I I. -P. 14 Q4 J.Q 930 1 0 C Q

I~~ ww 1 4J1~~ -J0W4 I 0 IID- _ rn gl =0i I I I1LC

I. 430 *. H.2 I ?!) 4O1 ~ I H. (1)Q0)(j) I w 41 0) w .6 wI 0w w I Q)U) -

IW4JI N 4j -a 9 ~( 4 j I~ I 4J W4-4 I 4J4 41 01 1, WvogI r-I --. ( r gI NIf ro WW 0' (li$M I II 1 ,I C3U.,q (vI -. r r, a 01 - .C w L4I N nfo~ (0

I I Hn H I.iWI I O4-L1-4UI NONHJ r ,a 9- 1' ~

I H- If04 -- R-T I -EI-n I N4 E- QwI 0 1 . 04 QII N 49J4 J i , --

I I 4:- HI- .4J0 CN . 4J HVUI IN W4- M~ QI (w ~ -I -4,M 4J J I IT C 44 C4 0 1 q4.. 4

41 - 4- :~ m I w I r. 1 t0) I II MWwI P. W>l> L

I1 Iv N. W-4 IJ2- PL 44M 0r O0) AI -rO0) WI NO -C. >4 -< ().4 %WI '-Cl -0 S4

.I 01 I 01). 0i I 04)Qu9 )I IIE U4I Ea 4111 (1I E M(3a I a)4 3( VZI ".4- El4- 4

I- *.*.I i M S I CnlI MI 4 OE 4 I WOEI M W

w J1 0 I -*I .

(a 1 1 I 4J H 1 I 4'

E4 - 1 I 4C3l (1). 1 IC4J r--i (j 1 1 >4.-- 011 ,-OI I (I w~ o I I I

I IL 1 4) * v 3)w U I *I PI ElI VI 1 I 3 0 -' 9 I N I CA 0 4J 4 ( -1 , I I- _

Q)u ()u 3) 1 w mw wl47r--

lump-Sum Palgent Benefit (Table VI):

Since PERUM ASABRI was established, tne lump-sum

payment teneifit has teen reassessed rive times to meet a

hig her comEensation cf tne mezbers being retired from the

service.

At the early stages, ifRU1 ASABRI differentiated the

amount according to the groups. When it was established, the

amount of RE.24.000, %as used as the basic calculation:

1 x Rp.24.OOC, for the Enlistedmem

2 x Rp.24.O00, for the Petty Officer

x Rp.24.OOC, for the Junior Officer

4 x Rp.24.O00, for the Senior Officer

5 x Rp.24.OOC, for the Flag Officer

later the basic calculation for the amount is the S

last grcss pay, based on the payscale which is already

differentiated according to the ranks or groups. Sc if the

payscale is well accelted, then the amount is determined by

aultiplying it with a certain numner. 5

464

S!ii .-

• . . , . o . .-

H v - *%I I IH I Ico0 >C

I H'- H:'-N H~ (N- vI I

I I H aI Hg H'- No - oI I~ 1 0 44~ HN HI C N n I I

Q) 1 410 llN No HV- H Na Enl I- I 04 r0v*) - wI "% w N I

I I af )- 0 aw aw a"III*r I ~ 33K I) 3CDC 0 =C

41 001.J 00 0 9 ~ t

W 1~ 04 1 %Fi % q

044 In I44 1E-4 :3 a 1 01 I (1 ) O1 a)

M 14 1 wI I I I1 wCU WOc)I14JI aIrqr v 19J W-4-4U 01 41 IXO44-4 () -U4...4Q) (n2 (12 CA2 (1

aI =1I 1 -,4441 .U,44444S 04 0 4 01 01 1 '44 00Y-4'1 '14 00 44 Z :3 zI1 El 1 4.4 OC N O)' 0w 0 0 0 0 11 4 1 0 1 OWWN4OWW~ SI W -4 14 w-4

A I Q) 1I 1I tnr+ 4.5. -r4-*E-4 ~I 10 1 4 ( I-H M 09J,-4 H- r-4 -4 H I

1 L-4 1w I H W~ 0 WW H Q 'w H r-4 I

W I coI

I4 u I

I I * I. I ~ ' CX45

S

C. IEE E EEFII SCHEIIS

1. The TY.e of Eenefits

7he types 2 of benefits provided by PERUM ASABRI

consist cf:

a. Lump-sum jayment benefit ( Table VI)

k. Cash value.benefit ( Table VII and VI.II)

c. reath risk benefit ( Table IX)

d. Eurial coziensation ( Table X)

2. The Riqhts of the Beneficiaries.

a. Those mezlbhers of the military personnel and the

civilian personnel of DOD who leave with the right of

retirement dated since August 1, 1971 or thereafter, will be

given the lump-sum payment benefit.

k. For those members who terminate the employment

because cf death within their active duties since August 1,

1971 cr thereafter, their survivors will receive: 5

1) Death risk benefit

2) Cash value benefit

c. Those menters enrolled as civilian of DOD as of

July 1, 19 5 or befcre, having reached the maximum year of

enrollment upon which its time of retirement will be less

than 12 years of memtership, will be given the cash value

benefit.

d. Those members who terminate employment without

the right cf retirement plan nor because of death in active

duties, dated August 1, 1971 or thereafter, will receive the

cash value benefit.

2 'he main sources of this section is: 'Pet unjuK untukMendalatkan Santunan ASABRI' jBef. 6]

44

7_ 7 7

-. -- - n c -.

Q) I I (T fn %) m r L T a

I~ Co 0 :r m -- m- m~c LA 0mg rN: cq-' m N N m 4 In tng

r4 -n r-I m

3c I I

0440

0) 04 00 - r-- q* ao c c -,I N 1 M LA cc

41 r- m) -. m m0 m'40

orI m r, - Lo m La Cr) m Cr)'Q

q -iq (t - I~ I IA f ~ . % *a ( N04 v 6 I-qI zg -: a C'4Q L Z; 14 1 'A \Z

Ad 0 1 01 I a; C400 0)~

1 00p gc Lr- rn n (N oLA LALA 010oI m1l Na 0% ( w LA 1w) LA LA w) wX \0 )w

gtg Ic (N c4 4 % LA r- Lo v LA r- 0a Log

14 141 ; N u r- o t 1 9 0 0gqa WI I (N L -(n 4 4.OL O v; ('*LA*'44 1PIl I N-( ('mr LAN r-g

C3I I

co~I(~r LAr r4 01 as co ('4 LA o r- I'

I I I m -. n - co a,% ('4 (N) U

fl - a-. a - fl- r- a- a- I-

43

With the sort of investment as mentioned above, the

positicn of the invested funds and its returns every year

can he seen in Table V from which one can onserve the posi-

tion ct the funds sizce its inception: ( omit year 1971 )

- he invested funds have increased 37 times

- The investment returns have increased 55 times.

As a public enterprise, PERUM ASABRI should be managed with

business principles, meaning that all expenses should be

covered by its income, or, in other words, no deficit should

cccur.

Erom Table V one can analyze that the ieturns on

investmert done by PIEUI ASABBI, from the year of its estab-

lishment, has always been increasin in amount, along with

the increase of the investible fund. This was made possille

by the fact that the expenditures (benefits and non

benefits) have always been lower than the collected ccntri-

butions frcz the members. The difference, together with the

returns of existing investment, can be accumulated,

resulting in an ever increasing invested funds.

It can also be observed that the benefits being paid

Each year is always lower than the contributions hein g

received. This means that the existing actuarial calculation

has been done very conservatively, because in a sccial

insurance principles, a strong established funds should be

created in early years, in order to be able to meet its long

range obligation, which certainli will always be growing.

The percentage of the benefits payment to the

contributic received from 1979 until 1982 was always

decreasing. This indicates that the benefit tdbles should be

reassessed.4

I

2I

4)0 0 0 0 0 00

a n 'o0 rn 0'Y ' (

4 4 4 (4 400

W.4J N' rn t- M -- LA r- (7' t-'1W 4 -7 'c4 Ln co c*4 us a ('4 co

w u I I I I S I I 1 9

m 0-g l -- g, I' S

w 0 r- 00 ON. 1

'04J II.m'

04

r. OD r-OQN

U) c s 41 (1 (*0 0 1

V)

a 4 O n o N'4 Ul% ON

?a '.0 (N- CD Cn r CO 'w

(D

IU1-4 '0 'D. r'- WD M 0 ('

I- rs fl- r% r. co co co >4W ViI i ON ) ? U N ) ON V ) ON (a

4'

The investment conpcsition as is shown in ah1e IV

is the ccmiany's implEmentaticn of the Financial Minister's

Lecisicn Nc 351, 1975 with the consideration that:

a. Time deicsits give monthly interest within a

relatively long pericd (more than 12 months), so the funds

not distributed can IE deposited in this form, providing the

safest way cf investient.

h. Promissczy notes being applied are the most

curreut concession besides giving a relatively high

inter Est.

c. Marketable securities perform a flexible invest-

ment, because they cat be used as short, medium, as well as

long term investment, depending on the existing economic

sit uaticn.

*

0

0

40

IV. TRY PRESENT VAIUE NOD1. FOR THE BENEFITS CALCUIATION

A. ASSUEPTIONS

Sccial change will to some extent unavoidably nullify

the theory or analyses made with regard to a static situ-

ation. 1he insurance program under examination emtraces a

length of time and sccial change may influence what are at

cne icint fitted conclusions. For that reason some assump-

tions should be made in analyzing the social insurance

syster as it presently exists.

1. It is assumed that the payscale will not change.

Although in reality there will be some change in payscale

6 due tc a fluid econcmic conditions, such cnanges wili be

reflected in the contributions and benefits iroporticnally.

Furthermcre the chances in payscale can not be anticipated

in advance, so a calculation can not be made withcut this

assumiticn.

2. It is assumed that the payscale being applied rcw is

considered fair and is fully accepted by the members. It

means that each group on the payscala has no complaint atcut

the scale as a merit system. It is also assumed that the

policy maker believes the same and tnat no significant

change will happen in the zerit system. This is impcrtant

because the basic benefit calculation being used by PEJM

ASABBI is the current payscale. The reason for using a pays-

cale geasure to determine the benefit amount rather than

using a fixed monetary amount is to avoid the inflaticnary

effect which will harm the value of benefit, if a fixed

* monetary ancunt is being used.

3. It is assumed that the interest rate in Indonesia is

12%. Although the real interest rate of the government

54

• " " -" " ' "'"" '" "" "W.""....""."".-."...-.".."....."......."..""."...."......•......-..."......•..-.-".....'...•.".-.....-..,.......

tanks varies arcund 12% while the interest rite for the

saving acccunt in conaercial tanks is ahout 18/, the scciai

insurance prograa is not a pure saving program. For the p

sake cf this analyses, the interest rate of 12% as was

cffered by the government tanks for period of 24 lcnths

(Table I) is being ajplied for the whole period of calcula-

tion.

E. SIBHIFICATIONS

1. Which Benefit is t.e Oject of Analyses? Since there

are fcur kind of benefits prcvided by PERUM ASABRI, it is

important to reduce and limit the scope ty choosing a

specific benefit as tte object of analises. The main issue

is what %ill happen tc the memters later on as far as their

insuzance Exograx is ccncerned?

a. Members may die during their active duties. In

this case PERUM ASABEI would provide them with:

1) Cash Value Benefit (Table VII and VIII)

2) Death Risk Benefit (Table IX)

t. Members prckably would survive and retired after a

certain length of time in the service. In this case EUM

ASABRI wculd provide them with:

1) Lump-Sum Payment Benefit (Table VI), upcn the

retirement date.

2) Burial Compensation (Taie X), when they die

after retirement.

c. Members may resign or quit from the service before

earning the right of retirement p1an and, according to the

insurance's chapter, PERUM ASABRI would provide them with

cash value benefit. 7hose memers who resign from the aili-

tary are not significant in number because if they resign

55

before they are ertitled tc retirement benefit, their

service will be meaningless for their pension plan. Members

who resign are probably do so for the following reasons: 5

I) Do not fit into the military life

2) Comit a crime resulting in heavy discipline

3) Unsatisfied with their current assignment orcareer. *

Rhatever the reason of their resignation, those members will

cbtain cash value benefit. The amount is calculated based on

the ccntribution paid to the company during their tile E.ent

in the service.

Since the calculation of the cash value benefit given to

the members who died or resign from the service is based

mainly cn the length of their contribution payment, the 5

benefit takes the term of a saving program to compensate

them for the discontinuity of the program. Therefore the

amount of cash value benefit given to beneficiaries is egual

to the value of the members savings until that time. This .

fact does not affect the formula being used in calculating

the cash value benefit and therefore does not influence the •

fairress consideraticn.The death risk benefit given to members who died while •

in active duties is really the benefit given away by PERUM

ASABRI. This is the real risk born by the company. The

higher tie amount of death risk benefit, the better it will

be for the survivor. A significant amount of this benefit 5

will be a real help for the survivors. On the other hand,

the higher the amount of death risk benefit, the heavier the

burden being carried by the company. Since death risk

benefit is a give away benefit, it is unreasonable for 5

members to argue the fairness of this benefit. This study

again will assume the death risk benefit is sulficiently

fair, except that the company differentiates the benefit

5

56 --.

L ............................. ........ ...... ... "-

multiplier for the different scale groups. As the payscale

is already differentiated among the groups, it is rot neces-

sary to differentiate the multiplier on the death risk

benefit.

The lump-sum payment benefit, combined with burial

compensation, will be received by most of the members ci the

program, since the survivcr and retired members are the

largest beneficiaries of this insurance program. Every

member expects to survive and retire. These individuals

represent the vast majority oi plan members. Therefore the

focal analysis of this thesis will be on the calculaticn of

the luap-sum payment benefit and the burial compensation.

That is related with the function of PERUM ASABRI AS the

saving insurance program.

2. For the purpose of simplification, the inflation rate

will mct be considered in this calculation. Although this

simplification will favor the company, the idea being used

are as.fcllcws:

a. Part of the inflation has been covered by the

interest rate being used.

b. Part of the inflation will be hedged by the

increase of payscale, which is assumed to be unchanged for

the reascn given above.

for these reasons the inflation rate, which in fact reached

9.7% in Indonesia in 1982, should be excluded from thecalculaticn.

2. Members will be in the service between 20 years and

32 years for officers, and between 20 years and 28 years for

the enlisted and petty officers. This simplification is madelased cn the minimal and maximum ages for the military

retiremert flan, which will draw the most population lying

between those ranges.

57

I J

4. Eromotion will basically follow the normal jattern 3

career, where in this study members are grouped as fast,

medius and slow ;romoted personnels durin their career, so

that a certain pay/pzcmotion for members can be plotted and

calculated easily. The factual discrepancy will not nullify

the result because alaost all career will lie in between the

slow and the fast promotion plans.

5. The analysis will use the base pay, instead of the

gross lay, in its calculation. Hence the marital status of

the members is ignored. In reality, almost 100% of male

military personnel get married during their career, while

some of the female military personnel stay single. The

spouse allowance is 5% of the base pay, while children

(maximum of three) will get allowance of 2.5% each. The

increase in take hcae pay as a result of marriage will

increase Eroportionally the contribution paid, and later the

amount of the benefits received. Therefore, marital status

can be icnored in the model.

6. Although the life expectancy in Indonesia is 48

years, [Ref. 19] it is assumed that, on the average,

Indonesian silitary jersonnel will die in 10 years after

retirement and the dependent will obtain the burial compen-

saticn.

C. 'E! MODEL

Based on the above mentioned assumptions and simkiifica-

tions, a model of a member of PERUM ASABRI having the obli-

gation of laying contribution and the right of receiving

benefits can be understood as follows:

3Keutusan MENHAbKAM/PANGAB No: KEP/A 8/II/1S72 tgl.23-Petruari-1972 tentany Pokck-Pokok Pembinaan FersonilSukarela Anykatan Bersenjata Relublik Indonesia. [Ref. 18]

58

I. A person enrclls in the military service on January

1, Year C.

2. He will autcuatically become the member of FEFJU

ASABRI, and pay the contribution through his salary with-

holding ( 3.25% * grcss pay every montn) .

3. He will stay in the service long enough to receive

his retirement benefit.

4. iithin his career he will get some promotion which

will influence his Lay scale:

a. Rank promotion.

b. Prayscale promotion.

5. The monthly jayment of contribution will be ccunted

lack to January 1, each year using the monthly annuity due,

because the payment is made in advance, with the interest

rate cf 12%, to find the yearly payment. The annuity due

factor is then = 11.368

6. Those yearly payment will be adjusted tc their

present value, using the present value factor with a 12%

interest rate. The accumulation will be added to find the

present value of the contribution on January 1, Year 0.

7. Ey the end of his service, he will terminate his

contribution and will obtain the lump-sum cayment benefit

which is 5 x last grcss pay. (The base pay will be used

instead). The benefit will be adjusted to its present

value, usirg the present value factor with 12% interest

rate, to find the lresent value of the lump-sum payment

kenefit cn January 1, Year 0.

8. later on he will die, and his dependent will receive

the burial compensaticn of Ri .90.000, This amount will be

disccunted to its present value, using the present value

factor with 12% interest rate, to find the present value of

the burial compensation on January 1, Year 0.

9. 7he present value of the lump-sum payment benefit,

combined with the present value of the burial compensation,

59

. .. . . . .. . . . .

w-i1i ttrer LtE compared Kti the present value ot tLe ccntzi-

t~tICE jdyMEnt On~ Juary 1, Year 0. A xey . UesticL to be

ExaminEd is whether the two Lumbers match. if not, shLIlcn

cne is aigher? lable X.1 shows how tae jzesent value mEthod

is oEin:$ usEd in this analysis.

60

&.

... . .. .. . . -

. w-

Ill. 0 :3 0 Ou 1-4 "

.0 u -,- w Q)1 (1 0 41 "I

;lb .1 4.. " "-• -

qj.,.. ".-

0 4 w "W %4j -

4 W 44 W-W 4W Qo.--(n 0) .&Q. w .W El 7-P

4c - 0 i.' I-4W a) Q U- -.El I

SI€"1 '- I '

cUl q A4 4 rl ,-!

W.I go aa ,= 5 1>

Ww I mE3 % -4a 0 .a)a 1 I

+1 WW QA W ..~I(

Q a% II .4 W IW '-4

* 0 0-I j ... . .-4r ..4 1 "-4'

0 U1 0 ) ) A tl. o u " ('N I I I

wm 1 0 0- 1 1 '1 10 I-0 ) a a) el'-I I II w0

OA :10 H'a I"I I

to .- -.. 4- - . 0 0- . ' .I i I I I I I I I I 0 1. * 4.) 4 -H a) HIN W ' I IIlI II II I W I

P, g - E 1gI4 0 C 4 I I I I I I I I I I I I I 4J4 Q EIw- Il9I I I p 5, I~ IIIIIII I

E- (l) ONl - I III III II I I I I I I I

4) rNu IN II I I I l I II II I I1- 1 C

U(Iw fsr111 I I I I I II I I I I I I11 I I -.0.ON-~ gil II 1 1 1 11 1 11 11 11 1 11 I >, 10I

E-4~I 0I I, IIONI II I III I I -

EIN I I II Ii~ III 11111111 ION-1 11 II'1 1 1

UI 111 1111III I I IIII I I I 10I I I II II I IIIIIIIIIIII I11 1 1 1 1 1 II II II I

611

V. THE USE OF THE PEESENT VALUE NODEL

In this chapter the model will be aplied to a zemhez's

contributions and berefits to evaluate its fairness.

A. TEE CABEER PATTE11

In ordex to make a compariscn between the present value

cf ccntzibution paid and the present value of benezits

received by a member, a sample of one person joining the

service is designed. A career pattern of a hypctheticaL

officer bill be exposed as an example as follows:

- Anycne wishing tc become an officer should pass through

one of the cfficer training programs, such as the Indonesian

Armed forces Academy.

- Ujcn ccmpletion cf that training, he will be commis-

sioned as a 2nd Lieutenant with 0 year base pay.

- During his career he will follow a promoticn pattern

(table XII) based on the Minister of Defense Decree Nc:KEP/A

8/11/1972 dated February-23-1972.

- Eased on this pattern and payscale, one can describe the

pay/Ircicticn pattern of an ozficer as follows:

- latle XIII = The iay/Promotion pattern for a Slow Career

Cfficer.

- latle XIV = Tic Pay/Promotion pattern for a MEdium

Career Officer. D

- Table XV = The Pay/Promotion pattern for a Fast Career

Cfficer.

In reality the pattern may vary witn so many possitili-

ties. However, in the average, these patterns capture the 0

essence cf pay/promotion pattern of a vast majority cf mili-

tary officers in Indcnesia.

662 .

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:~: :66

B. Ef RBESENT VALUI OF THE CCNTRIBUTIONS.

Based on those pay/promcoticn tabltes for slow, mediua and

fast career officers, we can calculate the contrituticns

that he would pay during his ailitary career as shown in the

follwcing tables:

- able XVI : The Eresent Value of Contributions made by

Slow Career Officers.

- Table XVII The Present Value of Contributions made by

Mediur Career Officers.

- lable XVIII : The Present Value of Contributions made by

fast Career Officers.

Fcr each of these tables, tne calculations are as

follcbs:

Column 1, 2, and 3 are derived from the related pay!

promcticn pattern tailes.

Ccluin 4 is the ccntributicn paid monthly, i.e., 3.25*

kase Fay of the year in each respective rank/payscale.

Ccluzn 5 is tic present value of monthly iaymEnt,

discounted back to the value cn January 1 of each year to

find the yearly payment, using annuit' due factor 11.3E8.

Ccluan 6 is the ;resent value factor using 12% interest

rate being assumed. -

Column 7 is the present value of yearly payment (column

5), disccunted back tc the value on January 1, Year 0.

Cclumn 8 is the cumulative present value of ccntribu-

tions paid after a certain numer of years in the service,

discounted tack to tIE value cn January 1, Year 0.

Usin; this table, the present value of the contribution

paid cr January 1, Year 0 and all the related calculation

can be seen for a member after any period of time in the

service.

67

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::N.41Q r m' g O N 7i rn V- co '.0 LA m (NO 0"O Co II QW C D I N rn)g(I (n C (4 (N4 CN r- T- - T- C) Q I I

two) I ,i I I I ( -- C4 ( fl. LA LAo - r (n '.0 O Ui)I

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W 04j- E3I r*I I 1 9 2 0 9 9 1 1 1 0 .1:21 t I W~ I 1~ 0% co - ON. (n.- CO '0 ( N O r- Lng

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80

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oimg- I gn I ZT m) ~m ( mi 9- LAO '.0 rI NI

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I IN 0- I-LP4 W I 1-1011 1 (4 N ( (N (N ( N r l I

- . S . . . . . . . . . . . . . . . . .79

lump-sum payment should be created. As an example, assume

the current benefit scale will be apilicable to mem ers who

retired after 20 years in the service, we may increase the

multiFlier for additicnal years of service, such as 12/30 *

gross pay = 0.40 grcss pay. Because of the 12% interest

rate beirg considered in this calculation, a rounded up of

0.50 grcss iay is sug~ested to be added to this new lumi-sum

payment benefit for every additional year. It means.if a

member retires after 21 years in the service, he will get a

lump-sum payment of 5.5 * grcss pay.

After 22 years he will get 6.00 * jross pay.

After 23 lears he will get 6.50 * gross pay, and so on.

Using this formula, new present value benefits tables

can be created as follows:

Table XXIII : The New P.V. Benefits for Slow Career

Cfficers.

Table XXIV Tie New P.V. Benefits for Medium Career

Cfficers.

Table XXV : The New P.V. Benefits for Fast Career

Cfficers.

By using tables of P.V. Contributions constructed earlier

(Table IVI, XVII,and XVIII) , we can combine those data and

create a new ratio table (Table XXVI) to see what will the

ratic lock like after the adjustment. The new ratio of

present value of benefits and contributions are still

decreasirg from year to year, but it appears to be much

better and more reascnable for the members in the insurance

program.

76 . -

. .-

S

i- --;; -,- ' ii -i -l ; -i .- -i -- , ' i 'i -..- .-.-- . .. . , . .--.. . .' , ". ' i i -- .-.-" i " .-, -, . -T h' ;-' ---

L. TEE CCBHARISCM Of THE P.V.CF CONTRIBUTIONS AND BZNEIITS.

frcm the figures cf the jresent value of contributicns

(Table XVI, XVII, and XVIII) and the present value for

benefits (Table XIX, 1X, and XXI), a comparison can be made

by a metber of PERUM ASABRI or any decision maker in evalu-

ating tle fairness cf the contributions/benefits ratio.

Table XXII shows the comparison between those figures and

the ratic between the benefits and the contributicns for

slow, medium and fast career officers.

It can be analyzed as fcllcws:

1. 7he present value of benefits a member will receive

is very lcw compared bith the present value of contributions

paid by that member.

2. There is no significant differences in the ratio of

the benefits and the contributions among the slow, medium

and fast career officer.

3. The longer a member stays in the service, the smaller

the present value of benefits he would obtain. The longer a

member stays in the service the larger the present value of

contributions he would pay. Hence, the longer a member

serves in the service, the smaller the ratio of the benefits

and ccntributions in the present value calculaticn. This

Evidence shows that the lump-sum payment benefit scheme

using a constant multiplier being applied (in this case 5)

is not in line with the merit system, where the longer a

member stays in the service, the higher the benefit he would

obtained.

The idea discussed in Chapter III that in every 30

months a member will Fay an additional of one month gross

Fay, will be taken into consideration for further analyses.

It seems that multicliez for the lump-sum payment benefit

should he on based cf a graduated scale according tc the

length of service. A base of multiplier to be used in a new

77

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r--.l 0n 9 C) c n 0 n L -~It a 0 c

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04 ~ ~ ~ ~ ~ ~ ~ ( 43 '0030)I I N1- N C r- M - (I

IWO) I a_ __ _ -I- M - -J - O q - 4 4

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Pq 41C ILIL 4 ( Cl) v- ' MN( (N W 1I

0O2 I C r C 0 N 0' M Ntr- C14L r- I

ob I wIo C 0 0D - C 0 0 a 0 0n a M "of1

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IV 9 o411"t C - ( () O v (n 403 0M (Nr- -I . .

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76

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w~~L 0N '- Wn -- V V N N.

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t"-l4Jv I 10 000 0 6 1 1 1 0 0

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C-1 Q a l C2 czO a a, a, D a a a, aAI a 10 * 0 Q Q CD .

jI~ If I Imo m m w m w ''0 m mI

I0 1 I~ 'a14~e40 00 u00 .4

14 I I a_1INVIIII 1a0 H ' H i k. w f w 0 a- a, w ' 0Q u w

to I- 4u I OCI(Z ( (N4 (N (N (N (N (N (N qN CD Ii (iI

73

• I

Cclumn 9 is the ccmbined Eresent vaiue benefits of bcth

the iumi-suz payment and the turial compensation, disccunted

to the value on January 1, Year 0.

Using this table, the present value of the benefits to

te received by a survivor, as discounted to January 1, Year

0 can te otserved.

7

I .

I

.I '.

i ll -

I

..I ,

7 2 "''I , .

72P

... ... . .. . . . . .. .. .. . .2I "

C. TEE TRESENT VALUE OF THE BENEFITS.

Since the focal analysis of this thesis is concerning

those bhc wculd survive the military career and earn retire-

ment benefit, we must analyze the following benefits:

1. the lump-sum iayment benefit, given upon the memter's

retirement.

2. the burial compensation benefit, given ujon the

member's death (which in this analysis is assumed to ke 10

years after the retirement date).

As the earliest retirement time for members is assuzed

to be 20 years after enrllment in the military, the

benefits tables are developed as follows:

- Table XIX : The Present Value of Benefits for Slow

Career Cfficers.

- Table XX : The Present Value of Benefits for Medium

Career Officers.

- lable XXI : Tie Present Value of Benefits fcr Fast

Career Officers.

Fcr each of these tables, the calculations are as

fol-lcls:

Column 1, 2, and 3 are derived from the related pay/

promoticn pattern tables.

Column 4 is the lump-sum payment benefit, 5 times of the

last year's monthly Lase pay.

Ccluzn 5 is the Eresent value factor using 12% interest

rate being assumed.

Coluan 6 is the Eresent value of the lump-sum payment

benefit (column 4) discounted to the value on January 1,

Year C.

Cclumn 7 is the Eresent value factor for the burial

compensation, using 12% interest rate.

Cclumn 8 is the Fresent value of the burial compensation

benefit (Ei.90.000,), discounted to the value on January 1,

Year C.

71

- • • -. . -, -. -.*. .**. ,* . . . . > . . * . •- • , . . • - -. - °

w .I I

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41'. Q) oI :T) o~ U) P- cN L-n o 1= gU). Ln -n ( m LI) co 0 m m. ,o 0a I

0IQ WJ a" 0 9 Cu Cu 1- 9I 1 1N o --Fu 419 g(:D m a% 0 co I n --rN N rN- -I

0I - -IL n L -r L : -t -: T ( ,

oI N L iI I- U '''t (:3 )C U r a%0Fr I.LIIo \O u to mr-o a-. Cu t) 0 7 . o I0 I

0Ia) 41 Om 'D O N 00 O) r- of rn m1 C) ON'0

IQI M I . a C4 A- r a; g- 4 - ' aI

jv.I1og1 r -o \D Cu 0 r- r N r- coco c m mi I

%. %

IV W 0 I- 'D M M J C '0 r, \ Cu 00. m 0 I

~ .I( a (U N -r 0 C o -r m L

G C" 1 , Ln 14 S

u ) . . . . . . . . . . . . . . . . . . . . . . . .-. t .- m

U -c -rL -c pl, 1

VI. CONCIUSIONS AND RECOMMENDATIONS.

Ihe critical result of this study can be summarized as

follc s"

1. It can be observed that from the company's financial

point of view (Table V), PERUM ASABRI clearly has a stable,

growing-and promising financial condition. As far as the

government continue tc regulate the membership contrituticn,

the ccmpany will have a guaranteed source of income and will

never go bankrupt. The future of the company's financial

conditions will be at least as good as it is now if they can

maintain their careful investment policy as it is applied

nOW.

2. PEEUM ASABRI dces not have significant future obliga-

tions, since the kind cf benefits provided by the company is

a single payment type benefit wherein no further obligation

exists ketween the company and the members after each

lump-sum claim is paid, except the burial compensaticn which

is prcvided upon their death. All of those obligations,

though, can be treatEd as a single year obligation. This

differs frcz the Social Security program where a continuous

payment is incurred sonthly to the old age members until

their death, hence become a burden of its accuzulating

future ctligations.

3. The eresent value of the cumulative contributions

paid is auch greater than the present value of the benefits

to be obtained by a member who survives and retires frzc the

military service. Because of this significant discrepency

the amount of the benefits should be reassessed and

adjusted.

4. 7he longer a member stays in the service the smaller

the present value of benefits be would obtain, on the other

83

• . , • • _ . o .. • . • . . - . . •. . .' - .. .. . . - . ,.... i ." " '.".: . .. ". ... - '. .2.. - .'"(.i . . . : -'-"- .2 -'. .. . . . .' - . - - , . .. :. .. .'

- .

hand, the larger the present value of contribution he would

pay, and therefore the smaller the ratio of the benefits and

contributions would be. Fron the standpoint of a merit

system, this kind of benefit scheme is not a fair situaticn.

A new formula shculd be designed for a better system.

5. The use of the last gross monthly pay as the basis of

benefit calculation is a logical one, since the gross iay is

part of the merit sysfem. The benefit using a fixed amount

cf money will need a freluent adjustment due to the infla-

tionary effect to the monetary value.

he following recommemdations are presented, based on

the above ccnclusions that the amount of benefits should be

increased and the fact that the financial condition of the

company is strong:

1. The current benefits scheme should be increased into

a certain amount that will nct harm the company's ojera-

tional ccntinuity.

2. Using Table V, the maximum feasable benefits (column

5) tc be Erovided by the company is at least egual tc the

contzibutions received by the company (column 4) . The

company'S operational expenses and non benefit expenses

(column 6) can be covered easily by the company's investment

returns (cclumn 3) for the years to come. Applying this

Folicy, the company could still reinvest the difference

between the current investment returns and the non benefit

expenses, in their irvestment funds. It is apparent that

the ccpany does not need to rely on membership contritu-

tions to pay for operational and non benefit expenses. 7he

formula cf the equation between column 4 and column 5 from

Table V is presented in Table XXVII It is obvious that the

benefit side should be increased by adjusting the value of X P

(the Eultiilier to grcss pay in benefit scheme) to eguali2e

with the contxibution side.

84

P

. . , .

41,

*..4*

0' .r 0

*4- +

0- 4J V*I 011 3 11

0 +uiQIV ~ - - 0 u ima 0 4

01 u oH 4 ri C'I 44 44 01P4 $4 V) 93.

00

4i 41 ni U) a

U) (n U t w is0 w

u u 00

L________853

. . )

. . . . . . . . . . . . .- . . .

4-4 w* .

(0 0- -H4 (V '0VwG GD LI- :3 4 ) UW

o q .14 0:2. Tj (d~. ~wU P(-W4 0QD".) (U

LI w w O

ui D. w 4-4MO 4J (3 D- UElI w(a W -A I 0 ) 0 -4 -4 W.4c'

GD -4 (3) 41 > " l -i w ' w) 4J- rq 0Q) T, -f' 44

w .4 UN 93 4OW UEn4 *-d '4 A 4 -a ILI $4 .4H- 4 OW 1, Q)- *i A

4.)a t P., WI :10 -4 *l .Lw - I

+J-4IW44 r- 4w w W44 a r-4 'I0 10 wU' mw 4J-H 04(

4if 04 GD-4 40 WD (2 04-4-14. 0 0 . -o ( 0 O C Ea Co 0GDD El (D :3 Q)o 0GD~

H nr 41) 0 0 -j*'-' 41- ou 14g o 1ou 0 11 011 0=1 l-4-'4m ~ pq bcd (0 u .4 -4 U)Tm (n')15 IIni- (nV T1 w "41

(0 WD -.4" 4.) -'40 0) 0 Ew- Ell- 1q- 91W- 7>4 .4 4) cl >i M0 -4 UI'-4 93S L$ ~ ItH M B108Z1 Ui311 U - U) 10

LI a)-4 U1 Wa) 0 4 '0BE-0 P..

v- 4 W4 AD WL GD r- 14 ( 9 ) pr4 3F- ,

.4 U) 9GD q GD ~ )00) 4 r)U U) L4 4.4 I0 -4 00 M02 4 0 WI-4 wI G 0 W S1

-4 U) GD U) w 41 U1) 0:2. (d 7A Q. :3 :31V- LI'0J GD LI 0L r-4~ 0 "." H w W W0

to w C 9) 93 0 G G 049 Q GwD "-4 4-4 0 0 nedHw14.) Q Li ..0 4 ra 'U) *a El 4. 4-4 .,1 4-A U

0 LI (n (v -- H LIj 14- W 03 a) LI-W0 WU) 0 wD WI" rA(a 9) 4.) 41 )-4 40 4J w LI Q1 G -0.

GD MI 0 U 41 LI U) 0 A. .Q) 4.0 GDGD G G G 0~ In El' 4 0. >

E4 0. 'H '0 LI ro LI 4 4 4J :3 (1 34J..0 Q) 0 D -4 a*'-H

4-4 4.4 4.4 'H P4.4 rk U0- ILi ri- Ci 0 11 9 r4 UJ4

Q I1 H LI H w I " 0~HHLI 0 LI LI LI LI 1 0 0 0 0 O5fl 0

GDG D D G '1. 4-4 -4 441 144 4J-4Q)0 I.0 GD QQ 00 t.o

.-4 W4 4 34 u W4 1- P4 ) 64 4 ;1

86

7he following reccmmendations are presented, considering

that tke benefits prcvided by the company shouid be in iine

with the meiit system.

1. 7he applicaticn of giving similar lump-sum payment to

every mezber, regardless of the length of time being spent

in the service, shculd be changed. This kind of practice

will benefit the members who stay in the service for a rela-

tively short time orly. 7he longer a member stays in the

service the more benefit he should receive in exchange for

the higher contributicn he has paid to PERUM ASABRI.

2. A formula to determine the constant factcr as a

multirlier to the gicss pay in providinj the new lump-sum

payment benefit should be designed. A method to find value

as the ccnstant number as shown in Table XXVII and Table

XXVIII is recommended.

It has been the purpose of this paper to shed a bit of

light on the highly ccmplex and little understood system of

social insurance in Izdonesia. If the preceding analysis and

recommendations have contributed one ioth to providing a

base for ircreasing that system's efficiency and fairness,

the authcr's efforts here not in any way spent in vain.

67

.................................... ...-

lIST 0f REFERENCES

1. An~ell, F.J. Insurance Princjies2 and PracticsRchald Press 6C pEy,-T;§

2. Brcwn4, J.D. An American Phiosoh of SccialS'Eecu4Eout, 1973. ~~C~O ~ie~

.3. Peitaturan i2emexintah Eejublik Indonesia, 3entuk-BentukIUsaha Ne gara, E.P. No 1, 1969.

4. Pezaturan PeMErintab Republik Indonesia AsuzansiSo~sial Peqawai beer Si P.P. No 25, 1681.

5. Pezaturan Pemerintah Republik Indonesia, AsuransiSosial ba~ *.A aita Anqkatan Bersenjata T -e1UZ 1 -1

I~~~ia, . P 07, 1-

6. Petumniu untuik iMendapatkaL Santunan ASABRI, FERUMI-5iX13'P7 NoW-5Zi9r 93

7. Associates in tte Social Sciences Department of Sccia'Sciences United States Military Academy, West Pciat-APrinciples of Insurance & Government Benefits for'STMIce Mrs~lneI7TU E-'d7, STU-C73c -

8. Greene, ?1.R. , Risk and insurance, 2nd ed., SouthWesternPuls in .T9

9. ILlabull, J.G. Williams Jr. C.A. and Cheit E.E.,Eccnolic and So'cial Securiti, 2nA ed., Ronald Press

10. Bockin 11J. and others, The Crisis in SocialScriht Problems and Eros ct - 2-U-d- InsT-itutfe

TZ Conempo~rayT-uzrsSal"e~rancisco, 1 78.

11. Sccial Securi ty Handbook US Department of Health,flucatiE-a--Ella-e,-Tedtr uarj- 1969.

12. Social Security Bulletin, Annual Statistical

Sgrvilces.

1.3. Social Securi t Bulletin, Annual Statistical1uj12eNmenf, Mi8 US -eURfen t 51Tre th -- ndTum"'Servi ces.

88

14. Interview with Lrs. Soe~adi PER[JM ASABhU, January

15. Keiutusan Presiden Republik Indonesia, Pembagian,Pen unaAnj, Cara Peo tonjan, Penye toran, d aE-sarn72ia-n yang Z ~un= -Uari- Peawai 1-Xeqeri ±e1 aE'N~da Un Pe~fima, P~7~n n K pres o3,17 -

16. Interview with Drs. fbamrin Lubis, PERUM ASABEI,Mr 8-aYT-7984T_

17. Lmenteri Keuaznyan Reputlik Indonesia, Penjarabanflaza-Dana Investasi Pezusahaan Asuransi-UIVa-TMTEr'--' NVR'AT31 IK7T"7-77"9 75.

18. LMeitexi ilANliA./iA14GAB Pokok-Pokok Pemtinaam Personi].Sukarela ABRI. NO: KIP/XS77T37*2.------

19. Ccuntries ct tie World and thieir Leaders 3rdi ed.,'GU-Tes ~afh CZip n7 7 D'UE- oi tT1-i cE7TT7 .

89

BIB LIOGEAPHY

Ackerman, S.B. Insurance, a Practical Guide, 3rd ed.,Ronald Press Company, -T3M.-

B41, B II Social !ecurity Today and Tomorrow, ColumtiaUniversity freT7t'---

Bar~c J..E. The Impact of Social Security on. PrivateSavinH, Evidnce!-o-W6U.3 Z-eI'PI11y ZBZea-'K,73'7B. -___

Cagan, P., The Effect of Pension Plans on Aq.regate SavijEvidence zzoY-id '5~j 3Sr'17 --aiU-aI Bureau U-EZromic

Eilersa R.B. and Crowe R.B, Gjroup. Insurance Handbock,Richazr LIzwia, Inc., 1U65.

Haber, W. and Cohen, W.J., Social Security Programs,,joErns&2, and Policies, Rich hrd TTj~7~O

MacLean, J.E., Life Insurance, 9th ed., McGraw Hill, 1962.

McKinley C. and Frase R W Launchinq Social Secu__llUniversity of Wisconsin tres,l197U.

Reder 1 V., Studies in the Theo~j of Welfare EconocsColumfia 5Mivers-F-tT-1es3-7 Un3-

Van Gcrkcz W Eccial Security the Lonq-j2em Lef icit,ABI fcr iutiic PolicT R63-a!-cET97t

Wynn S. World Trends in life Insurance, A Halsted PressBook, ISM~.---- -

90

INITIAL DISTIBUTION LIST

No. Ccpies

1 . Lelense Technicali Information 2Camexon StationAlexandria, Virginia, 22314

2. likrar ycode 01L42 2liaval, iost graduate Sc.iool,Mcmterey, Calif czria, 93943

3. Zejiartment C~jiuan,code 54 1Lepartzezt c Admn nstrative SciencesNaval Post graduate Schoolrcnterey, Califczmia, 93943

4. Frofessor Skin Liac, code 54 1DoEj.artiient of Adziistrative SciencesNaval Postgraduate SchoolEonterey, ca].if crnia, 93943

5. EicofessortBcger Evered, accde 54 1Lepaz tment o~ Administrative SciencesNaval Postgraduate School!cnterey, ca].if crnia, 93943

6. CDR Eddy Noegrolc 1Iarkas Besar TNI-ALZakarta, Indonesia

7. IKejala Korps Adzinistrasi .2tarkas Besar TNI-ALJakarta, Indonesia

8. FC1 leg ul Santcsa 2

Jakarta, In donesia

9. rPer ustakaan Pusat 2farias Besar TNI-ALJakarta, Indonesia

10. zer ustakaan AKAELRI Bagian laut 2AKA1FI Bagian LautSurataya, Indonesia

91

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DTIC. . : . . .. . . . ...... :.-.-,