Just What Is Social Insurance

Last week, I objected to the increasingly-frequent use of the talking point that Social Security is “insurance” for which we pay premiums, so that we have a right to these benefits just as much as we do the right to file a claim for a paid-up insurance policy.  In the course of my article I said, “Social Security is social insurance.  But social insurance is not insurance,” and it seemed appropriate to explain this further, because we in the United States aren’t used to this terminology.

After all, social insurance might sound like it is simply “insurance provided by the government.”  But that fails to understand what insurance is — a third party paying claims based on risk-based premiums.  Social insurance is no more a kind of government-managed insurance than French toast is a kind of toast or a dwarf planet is a planet.

Readers may recall the expression “government is simply the name we give to the things we choose to do together,” which was roundly ridiculed by Republicans ever since Democrats (reportedly originally Barney Frank) proclaimed this.  But substitute in “social insurance” instead of “government” and you have a pretty good idea of what it is:  programs intended to provide benefits to the general population, or specifically the working population, typically funded by similarly universal payroll taxes (often with caps).  These programs are differentiated from social assistance programs in that the latter are means-tested, though in practice many countries provide hybrid benefits.

Policy nerds will at this point want to check out Social Security Programs Throughout the World, which is published by the Social Security Administration jointly with the International Social Security Association.  It’s a wealth of detail, and a perspective-shift, because in most countries the social insurance system is considerably more expansive than that of the United States, including the following benefits:

  • Old-age pension
  • Disability/sickness benefits (short and long term, work-related and not, and possibly including some benefits for caring for sick children)
  • Survivor’s benefits for spouses and children
  • Medical treatment
  • Parental leave
  • Child benefits
  • Unemployment benefits

Looking at this list of benefits as a whole makes it clearer that these are not “earned” benefits but general programs paid for in a universal manner.  Some of these programs exist because it’s judged to be infeasible to expect the general working population to manage individual insurance, others simply because of a consensus that providing these benefits serves to benefit society.

What differentiates a social insurance from a social assistance program?  Most obviously, the latter programs are means-tested.  But there are commonly requirements in social insurance programs that require that you have an established work history, so as to validate your status as a worker and ensure that benefits are based on your long-term pay history.

For example, in the US social security disability requires having worked a certain number of years, and being employed at the time of disablement.  But elsewhere (e.g., Sweden) all employed persons as well as formally registered jobseekers are eligible.  It helps to think of the US requirement of minimum number of working years not as a way of earning your benefit (“paying your premiums”), but as a way of demonstrating that you are a part of the workforce in a meaningful way.

Consider another example:  the parental leave system that many countries have.  In Sweden, for instance, benefits of 80% of lost earnings are paid for 390 days, with maximum and minimum benefit levels, funded by a tax on employers of 2.6% of payroll.

Are benefits “earned”?  No, of course not.   Are they insurance premiums?  You can’t pay premiums in a way that reasonably reflects the likelihood of becoming pregnant — because it’s the older folks, who have long since past the point at which they might have children, who subsidize the younger ones, and it’s the childless, or one-child couples who subsidize the two-or-more-children families (that is, because we’re generally talking about countries where the average family is less than replacement level).  But they are a part of the social insurance system.

Fundamentally, to understand and talk about social insurance programs, we simply have to discard all concepts about “earning” or “paying premiums.”  That is not what social insurance is about.

And you cannot speak of these as benefits one has a “right” to except insofar as, once the government has established a program, everyone has the right, under the law, to fair and just administration of the terms of the law.

Social insurance benefits exist because, to whatever degree they exist in countries around the globe, it is the consensus of the government/the people that this is the right way to manage both the risks and the spending needs at different life stages for working people.

But having said that, there are all manner of reasons why there might be disputes about what the right level of social insurance benefits is, or what the right way is to provide them, or where the line should be drawn between social insurance (again, broad coverage for the working population, paid for by the working population) and social assistance (means-tested).  A too-generous retirement system spells trouble if the demographics no longer work in your favor or simply in the case of budget crises.  Too-generous disability benefits can result in people gaming the system and claiming disability when they are perfectly capable of working.  Any system which, in total, is exceedingly generous in its benefits will also be exceedingly expensive in terms of tax rates, to the overall detriment to the economy (one example:  in the Czech Republic, the total employer and employee contribution to social insurance programs works out to 45% of pay), and can produce resentments, whether deserved or not, especially in countries with weaker social cohesion — the higher social insurance benefits are, the greater the degree to which people will resent their neighbor on disability who looks perfectly healthy, or the retiree whose classification as being in an arduous occupation earned generous early retirement provisions.  A couple in which one parent choses to care for children at home long-term will resent paying taxes to fund the neighbors who benefit from parental leave benefits.  Small families or childless individuals will resent paying child benefits to larger families, or to parents that they judge unfit.  All these systems, because by and large they assess uniform percentages of capped pay from workers, deny choice to workers who, for example, would rather do their own saving for retirement, and compensate for lower saving rates while raising a family with greater saving before and after this life stage.  And on top of this, it’s the nature of bureaucracy that, no matter how much state-run systems can benefit from lower administrative cost and the ability to enforce spending limits in a top-down manner (e.g., with caps on the number of medical providers), private sector systems are better able to innovate, for instance, with better return-to-work programs for the disabled.  Oh, and, finally, the appropriate line to draw between social insurance and social assistance programs is not always obvious — should someone who’s disabled or on parental leave and whose spouse earns a pittance receive the same amount as a similar person whose spouse is wealthy?  Should a surviving spouse receive such generous widow’s and orphan’s benefits that she doesn’t need to work, or if, on the other hand, her own income added in makes the family quite well-off indeed?  And how, in general, do you balance the impulse to provide for the general welfare with the overall desire to limit the growth of government because of an overarching principle that it’s best to let people make their own decisions about their lives to the greatest extent possible?

And, yes, I apologize for the over-long paragraph.

The bottom line is that the question one must ask with respect to these programs is not “do people have a right to these benefits?” but instead “what is the social insurance/assistance system which best balances these competing concerns and to provide for the general welfare in the most appropriate manner, bearing in mind all relevant factors?”

Yes, I’m a nerd, and an actuary to boot. Armed with an M.A. in medieval history and the F.S.A. actuarial credential, with 20 years of experience at a major benefits consulting firm, and having blogged as “Jane the Actuary” since 2013, I enjoy reading and writing about retir