User:8713LOLA/Social Insurance

Meaning of Social Insurance

Social insurance is a concept where the government intervenes in the insurance market to ensure that a group of individuals are insured or protected against the risk of any emergencies that lead to financial problems. This is done through a process where individuals’ claims are partly dependent on their contributions, which can be considered as insurance premium to create a common fund out of which the individuals are then paid benefits in the future. Thus, Social Insurance is also a concept based inherently on the work done by the Individual over his life and how they will ultimately benefit from this.

Examples of Social Insurance include :

• Medicare, Medicaid
• Social Security
• Unemployment Insurance

Features of Social Insurance

• The contributions of individuals is nominal and never goes beyond what they can afford
• 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 and benefits are given to everyone much like a right, which ensures that no one's personal financial background is not always called into question

Need for Social Insurance

Social insurance is based on the premise that there is not always equitable distribution of resources or benefits in an competitive economy and there must be provisions to ensure that participants in the market do not end up with an "all-or-nothing-game" It is a means to allow participants of a dynamic economy to take risks and engage in economic activity with the assurance that in the instance of an emergency, they will be protected through this accumulated fund. Social insurance provides "social justice" and "social stability"

The following reasons specifically identify the features of a market economy that give rise to the need for social insurance:

Asymmetric Information

This is a form of failure in a competitive market where there is not a parity in the provision of information between buyers and sellers or in this situation insurers and the insured. If the risk involved in a transaction is not made equally clear to both parties then the trades are differently valued by the two parties.

The difference in knowledge between insurers and insured about the risk level ultimately leads to the problem of Adverse Selection. An example of this problem would be the situation where insurers set a particular price for health insurance that is too high for individuals with low risk of getting sick and thus only those with a high risk of getting sick purchase this insurance. Ultimately the insurance company is losing money since they cannot discriminate between buyers and thus they further increase prices. This increase continues to eliminate individuals whose risk level is not enough to pay the prices of this insurance and insurance companies enter the Death Spiral

Redistribution

In order to achieve a better and more equitable distribution of insurance costs, the government intervenes through the means of taxation of low risk individuals in order to subsidise the premiums that have to be paid by high risk individuals. Therefore there is a redistribution from low risk individuals to high risk individuals.

Externalities

If individuals do not have social insurance and are thereby unable to afford the basic right of healthcare, then not only are they subjecting themselves to illnesses but also creating the likelihood that others around them will be infected as well. This would be an example of a negative externality.

Durability of Social Insurance

The existence of social insurance stems from the acceptance of the ideology that workers should be insured against the risk of losses of economic status due to their participation in the labour market. This inherent idea of fairness has propagated the desirability and subsequent durability of this program.

1. Social Insurance provides protection against certain risks in the economy that private insurance fails to deal with. Private insurance often becomes extremely unaffordable due to the issues of adverse selection and moral hazard, and to counteract such steep prices, the need for a publicly mandated social insurance increases.
2. Social Insurance is considered fair and socially responsible because it taps into the human desire of wanting to help individuals who face risks that are not their fault and neither are they in their control.
3. The premiums required for the existence of social insurance policies come from workers who will ultimately be covered by the benefits and this sense of accountability makes the program seem fair and its beneficiaries, deserving.
4. Social insurance helps account for the lack of predictability that individuals in the market have regarding their retirement, health and stability and thereby insures them against long term risks that they now no longer need to think about but are, for the most part, inevitable.

Consequences of Social Insurance

Moral Hazard

An issue of Social Insurance is that often, individuals who are insured against certain risks become complacent and more likely to take adverse actions because they are secure in the knowledge that they will be insured against the adverse outcomes of these actions. This process is known as Moral Hazard and is a drawback of providing insurance to everyone because then the government and insurance providers cannot monitor the insured and must bear their costs of immoral actions.

Intergenerational Acceptance and Desirability

Those that critique the program of social insurance bring up the argument that programs such as social security only increase the burden on the employed youth of the country because of the number of retired individuals that are the beneficiaries.

However, this has been mitigated by research that shows that although the number of retirees that benefit from the working youth is significant, the number of children that American families are raising, have considerably fallen. Thus, the number of members in a family that need to be supported have reduced. The question of whether this is fair still remains on the youth who must decide whether this offset in payments is enough of a counteracting effect.

In 2019, receipts from Social Insurance taxes, the second-largest revenue source, increased by $72 billion (or 6 percent), and increased as a share of the economy from 5.8 percent in 2018 to 5.9 percent in 2019, climbing just above the 50-year average of 5.9 percent.

"The increase in payroll tax receipts reflects higher wages and salaries and the reallocations made between payroll and individual income taxes"

Labor Supply Effects

Unemployment Insurance and Worker's Compensation are essential aspects of Social Insurance that indeed provide unparalleled assistance to citizens facing uncertainty regarding their jobs. Although these programs have obvious benefits, they also affect the labor supply because they incentivise workers to spend time out of work and thus the time that these citizens are unemployed is longer.