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Social insurance

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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 (but additional sources of funding may be provided as well); and
  • the program serves a defined population, and participation is either compulsory or so heavily subsidized that most eligible individuals choose to participate.[1]

Social insurance has also been defined as a program whose risks are transferred to and pooled by an often government organisation legally required to provide certain benefits.[2]

In the US, programs that meet these definitions include Social Security, Medicare, the Pension Benefit Guaranty Corporation program, the Railroad Retirement Board program and state-sponsored unemployment insurance programs.[1] The Canada Pension Plan (CPP) is also a social insurance program.

The World Bank's 2019 World Development Report on The Changing Nature of Work[3] considers the appropriateness of traditional social insurance models that are based on steady wage employment in light of persistently large informal sectors in developing countries and the decline in standard employer-employee relationships in advanced countries.

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.[4]

Differences from private insurance

Typical differences between private insurance programs and social insurance programs include:

  • Private insurance programs are generally designed with greater emphasis on equity between individual purchasers of coverage, and social insurance programs generally place a greater emphasis on the social adequacy of benefits for all participants.[4]
  • Participation in private insurance programs is often voluntary; if the purchase of insurance is mandatory, individuals usually have a choice of insurers. Participation in social insurance programs is generally mandatory; if participation is voluntary, the cost is heavily subsidised enough to ensure essentially universal participation.[4]
  • 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 nonpayment of premiums). Social insurance programs are not generally based on a contract but 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.[4]
  • Individually purchased private insurance generally must be fully funded. Full funding is a desirable goal for private pension plans as well, but is often not achieved. Social insurance programs are often not fully funded, and some argue that full funding is not economically desirable.[4] Most international systems of social insurance are funded on an ongoing basis without reference to future liabilities. That is seen as a matter of solidarity between generations and between the sick and the healthy as a part of the social contract. 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 is in the United States, where 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, US government actuaries periodically attempt to predict up to 70 years in advance the longevity of the fund and must 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 so. Despite the US 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.

Difference from welfare

See also: Welfare state

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.

See also

References

  1. ^ a b "Social Insurance", Actuarial Standard of Practice No. 32, Actuarial Standards Board, January 1998.
  2. ^ Margaret E. Lynch, Editor, Health Insurance Terminology, Health Insurance Association of America, 1992, ISBN 1-879143-13-5.
  3. ^ World Bank World Development Report 2019: The Changing Nature of Work.
  4. ^ a b c d e Robert J. Myers, Social Security, Third Edition, Richard D. Irwin, Inc., 1985, ISBN 0-256-03307-2.
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