Social insurance

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 United States, 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.

Social insurance is a public insurance that provides protection against economic risks. Participation in social insurance is compulsory. Social insurance is considered to be a type of social security.

Social insurance differs from public support in that individuals’ claims are partly dependent on their contributions, which can be considered as insurance premium. If what individuals receive is proportional to their contributions, social insurance can be considered a government "production activity" rather than redistribution. Given that what some receive is far higher than what they attribute (on an actuarial basis), there is a large element of redistribution involved in government social insurance programs. The largest of these programs is Old age. Survivors' and Disability Insurance Program (OASDI). It provides income not only for pensioners. But also to their survivors (especially widows and widowers) and people with disabilities. Other major social insurance schemes are workers' compensation, which provides compensation for workers injured at work, unemployment insurance providing temporary benefits after job loss, and Medicare. The Medicare Program, which provides medical services in old age (like Medicaid), has grown rapidly since its first introduction in 1965 and is now the second largest program. Social security and Medicare are sometimes called middle class programs because the middle class are the main beneficiaries and benefits are not provided on a need basis, but when people satisfy a certain requirement, for example age. As soon as they satisfy the criteria, they can receive benefits.

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]