January 21, 2022

What is social insurance?

What is social insurance?

Social insurance may be an unfamiliar term, but most people are familiar with the programs. Citizen-funded, government-run programs that support the community during times of financial instability, whether due to financial hardship, disability, or age, are considered social insurance.

Social insurance programs are funded by the people who use them. Look at an average salary and you’ll see deductions for Social Security, health care and unemployment. Those deductions feed the pool of benefits that create a safety net for retirement or in the event of hardship or illness.

Most people don’t think of Social Security benefits, unemployment benefits, or workers’ compensation as insurance, but that’s exactly what they are: a system that provides a cushion to protect participants from financial harm.

Examples of federal social insurance programs include:

  1. Social Security provides a basic income for those in their later years.
  2. Unemployment Insurance offers income replacement after a job loss.
  3. Medicare offers low-cost health insurance to people over 65.
  4. Work allowance replaces lost wages after an employee is injured on the job, and funds vocational rehabilitation.
  5. Social Security Disability Insurance provides income for those who are unable to work due to illness, injury, pregnancy or childbirth.

The History of Social Insurance

Although the social insurance programs we know of are a relatively new institution, public assistance for those with incomes below the federal poverty line has a long history, dating back to colonial times in North America. The colonies modeled their own aid programs after the 17th-century Elizabethan Poor Laws. The shift from almshouses to programs that encouraged independent living took place in the 19th century.

Formal social insurance programs were first introduced by German Chancellor Otto von Bismarck in 1883, starting with state-provided health insurance and supplementing their benefits with workers’ compensation and retirement benefits. Other European countries quickly followed Germany’s lead.

Social insurance programs that most Americans would recognize today were introduced in the United States in 1935 when President Franklin D. Roosevelt signed the Social Security Act. Such a social insurance program was necessary, Roosevelt argued, as communities grew larger and family support became more difficult to find. Roosevelt wanted to give citizens who had worked hard the opportunity to rest in their golden years or in times of physical illness.

In 1965, President Lyndon B. Johnson signed the Medicare Act providing low-cost health care for seniors. Disability benefits followed in the 1980s.

Differences between social insurance and public assistance

When it comes to government-run benefit programs, one of the key differences between public assistance programs such as the Supplemental Nutritional Aid (SNAP) or Temporary Assistance to Needy Families (TANF) and social insurance programs is financing.

Social insurance programs are universally funded through payroll deductions or taxes and are available to anyone who has paid into the system. These payroll taxes are for these specific programs, not general taxes.

Public assistance programs are based on financial needs and have no contributions, as it were. Instead, public assistance programs are paid for from the federal budget: $4.6 trillion in 2020, which was 21.8% of US GDP that year. Many programs, such as Medicare, CHIP, and SNAP also receive funding from the state budgets.

For example, if a family is considered below or near the poverty line, they are entitled to assistance with the cost of food and shelter through programs such as SNAP or TANF. They are not required to pay in those programs. Instead, they must qualify based on their average income as determined by the Internal Revenue Service.

In contrast, the amount of a citizen’s Social Security benefits is based on how much they earned during their 35 most lucrative years of work. Likewise, unemployment benefits are based on the length of time and salary an employee has paid to the unemployment system under a single employer.

Many social insurance programs are also subsidized by employers. Employees pay half of the established tax rate and their employer pays the rest. For the self-employed, the premiums for social insurance programs are paid through the self-employment tax.

Key learning points

  • Social insurance is a universally funded financial safety net operated by the government.
  • Programs include Social Security, unemployment insurance, and Medicare, among others.
  • Social insurance differs from government aid based on funding sources. Social insurance is funded by contributions from every citizen who benefits from the services.

Many social insurance companies have private insurance counterparts, such as private disability insurance, retirement accounts, or private health insurance. All of these services require additional premiums or contributions paid out of pocket. However, payments to each citizen’s social insurance programs ensure that premiums/taxes remain low and the pool of resources remains stable for those in need of assistance.

Government supervision of social insurance

Since social insurance programs are all administered by the federal or state government, they may be changed from time to time to increase benefits beyond what is funded by individual citizens. An example of this was the introduction of unemployment benefits for contract workers, as envisaged by the CARES law of 2020. Also the Social Security Administration regularly reviews payments based on the cost of living, so that the level of benefits keeps pace with the common expenditure.

It comes down to

The need for societies to provide financial assistance to those with incomes below the federal poverty line, older adults, and the disabled is not new. The colonies created relief programs modeled on the British Elizabethan Poor Laws of the early 17th century. The United States instituted a more formal system, familiar to most people today, when President Franklin D. Roosevelt signed the Social Security Act of 1935, establishing a federal safety net for elderly, unemployed, and disabled Americans. Since then, the country has expanded social security programs to meet the needs of various populations, such as health care for children and assistance to injured workers. The beneficiaries of social insurance programs have already paid to the funding sources, a factor that sets them apart from government aid.

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