Social insurance is any government-sponsored program with the following four characteristics:
- the benefits, eligibility requirements and other aspects of the program are defined by statute;
- explicit provision is made to account for the income and expenses (often through a trust fund);
- it is funded by taxes or premiums paid by (or on behalf of) participants (although additional sources of funding may be provided as well); and
- the program serves a defined population, and participation is either compulsory or the program is subsidized heavily enough that most eligible individuals choose to participate.
Social insurance has also been defined as a program where risks are transferred to and pooled by an organization, often governmental, that is legally required to provide certain benefits.
In the U.S., programs that meet these definitions include Social Security, Medicare, the PBGC program, the railroad retirement program and state-sponsored unemployment insurance programs. The Canada Pension Plan (CPP) is also a social insurance program.
Similarities to private insurance
Typical similarities between social insurance programs and private insurance programs include:
- Wide pooling of risks;
- Specific definitions of the benefits provided;
- Specific definitions of eligibility rules and the amount of coverage provided;
- Specific premium, contribution or tax rates required to meet the expected costs of the system.
Differences from private insurance
Typical differences between private insurance programs and social insurance programs include:
- Equity versus Adequacy: Private insurance programs are generally designed with greater emphasis on equity between individual purchasers of coverage, while social insurance programs generally place a greater emphasis on the social adequacy of benefits for all participants.
- Voluntary versus Mandatory Participation: Participation in private insurance programs is often voluntary, and where the purchase of insurance is mandatory, individuals usually have a choice of insurers. Participation in social insurance programs is generally mandatory, and where participation is voluntary, the cost is heavily enough subsidized to ensure essentially universal participation.
- Contractual versus Statutory Rights: The right to benefits in a private insurance program is contractual, based on an insurance contract. The insurer generally does not have a unilateral right to change or terminate coverage before the end of the contract period (except in such cases as non-payment of premiums). Social insurance programs are not generally based on a contract, but rather on a statute, and the right to benefits is thus statutory rather than contractual. The provisions of the program can be changed if the statute is modified.
- Funding: Most international systems of social insurance are funded on an ongoing basis without reference to future liabilities. This is seen as a matter of solidarity between generations and between the sick and the healthy as a part of the social contract. In essence this means that the current generation of healthy working people pay something now to meet the health care and living costs of those who are currently temporarily incapacitated through sickness or who have ceased work through old age or disability. The main exception to this rule is the United States. There, the two largest programs, Medicare and Social Security programs, the administrators have historically collected more in social premiums than they have paid out as social benefits. The difference is retained in a trust fund. In both programs, U.S. government actuaries periodically attempt to predict up to 70 years in advance the longevity of the fund. To do so they have to estimate the future rates of contributions and pensions, the types of health care needs of the beneficiaries, and what that might cost. No other country in the world does this. Despite these U.S. programs being in considerable surplus, the political argument is often that these programs are "going bankrupt" or that politicians have spent the money on other things, neither of which can be. Although social insurance programs are often not fully funded, some argue that full funding is not economically desirable. Some argue that private insurance is fully funded, but this is not always true. Employer provided pension plans are frequently underfunded and private life insurance companies set their annual premiums against likely costs in the coming year and do not project future premiums and expenditure 70 years into the future as Medicare is forced to do.
Difference from welfare
With social insurance, the beneficiary's contributions to the program are taken into account. A welfare program pays recipients based on need, not contributions. In the US, Medicare is social insurance and Medicaid is welfare.
- Generational accounting
- Social Insurance Number (Canada)
- Social security
- Social Security (United States)
- Social Security (Sweden)
- Social Security (Australia)
- Social Security Disability Insurance (United States)
- Social health insurance
- Social Protection
- Social Protection Floor
- Social safety net
- Social welfare provision
- Welfare state
- Welfare culture
- "Social Insurance", Actuarial Standard of Practice No. 32, Actuarial Standards Board, January 1998.
- Margaret E. Lynch, Editor, Health Insurance Terminology, Health Insurance Association of America, 1992, ISBN 1-879143-13-5.
- Robert J. Myers, Social Security, Third Edition, Richard D. Irwin, Inc., 1985, ISBN 0-256-03307-2.