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Social Insurance

Updated on January 31, 2024
Article byRutan Bhattacharyya
Reviewed byDheeraj Vaidya, CFA, FRM

Social Insurance Meaning

Social insurance refers to government-backed, citizen-funded programs that aim to support people during financial struggles resulting from disability, reduced earnings following retirement, loss of employment, etc. It helps account for life’s unpredictability that a person might face during retirement or a health-related crisis.

Social Insurance

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The concept is based on the assumption that the equal distribution of benefits and resources in a competitive economy does not always exist. Moreover, it enables a dynamic economy’s participants to get risk exposure and carry out economic activities with the confidence that during an emergency, they will get protection via the social insurance program.

Key Takeaways

  • Social insurance refers to financial protection offered by the government against various types of economic risks through different programs funded by the nation’s citizens.
  • A noteworthy advantage of such programs is that they offer coverage to the insured for any externality they face owing to any economic activity conducted in the economy.
  • Some popular types of this insurance are Worker’s compensation, public unemployment insurance, and public health insurance.
  • A key difference between social assistance and insurance is that mandator payments are not necessary in the case of the former.

How Does Social Insurance Work?

Social insurance refers to a type of social welfare that offers insurance against different economic risks. One may get this form of insurance through the subsidization of private insurance. Alternatively, individuals may be publicly offered it. As noted above, citizens using such programs fund them. One can observe an average paycheck to find the ductions for Medicare, unemployment, and Social Security. Such deductions add to the multiple benefits that offer a safety net in the case of illness, hardship, or retirement.  

Some features of social insurance programs are as follows:

  • Individuals make nominal contributions, which never exceed the amount they can afford.
  • The premiums or taxes paid on behalf of or by participants fund such programs.
  • In this case, a statute defines the program’s eligibility requirements, benefits, and other aspects.
  • The government makes explicit provisions to factor in expenses and income, often via a trust fund.
  • Such programs serve a clearly-defined population. Moreover, the government makes participation substantially subsidized or compulsory so that the majority of the eligible individuals decide to participate.

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Types

Some popular types of social insurance programs are as follows:

  • Social Security: This refers to a system under which a nation’s government makes regular payments to specific groups of persons, such as unemployed persons or sick people.
  • Public Auto Insurance: Public auto insurance refers to a government-backed-and operated mandatory automobile insurance system. It enables vehicle owners to minimize the costs they might incur because of an accident.  
  • Public Health Insurance: Essentially, a public health insurance plan is a scheme offered by a government for older people, low-income families or individuals, and persons qualifying for special subsidies. The main public health programs in the United States are Medicaid, CHIP, and Medicare.
  • Universal Parental Leave: This is an employee benefit that individuals get in almost every country. One must note that ‘Parental leave’ may include paternity, adoption, and maternity leave. Alternatively, one may use the term to describe a separate family leave that either parent can get to take care of their small children.
  • Public Unemployment Insurance: Public unemployment insurance refers to government-run insurance programs offering out-of-work persons financial assistance if they fulfill specific eligibility requirements.
  • Worker’s Compensation: It replaces the wages an employee loses after suffering from an on-the-job injury. Moreover, such a program funds vocational rehabilitation.

Examples

Let us look at these social insurance examples to understand the concept better.

Example #1

Suppose Sam is a person aged 67. He is suffering from cardiovascular disorder. Although he is not in a strong financial position, he is not worried about the medical expenses that he may have to incur owing to the benefits offered by Medicare.

The government-run social insurance initiative has four parts. Parts A and B provide coverage for his hospital stays and specific outpatient services, respectively. Part C allows Sam to customize his covers based on the medical requirements. Finally, D offers him coverage for the costs incurred for purchasing prescription drugs.

Example #2

In Japan, the ruling camp and the government are looking to increase social insurance premiums with an aim to fund unprecedented measures to address the nation’s decreasing birth rate. The reason behind raising the premiums is to ensure that they do not anger the citizens by increasing the tax rates. Several trillion yen might be necessary to execute every item in a measures’ draft package to tackle the low birthrate figures released in March 2023.

The government must win the business world’s support to increase social insurance premiums. Moreover, they must get support from persons who do not have a child or have already raised children.

Benefits

The advantages of social insurance are as follows:

  • It bases its advantages on when a person chooses to retire, putting everyone in control of their finances.
  • This type of government-run program may provide benefits over private insurance when a beneficiary or their family member suffers from a hereditary or chronic disease.  
  • Such insurance programs solve the issue concerning asymmetric information as they offer a range of costs for each issue patients may report.
  • It provides individuals with coverage for externalities faced owing to any activity carried out within the economy.
  • The majority of social insurance programs aim to reduce inequality and poverty.

Criticism

A serious issue of this type of insurance program is that persons insured against specific risks usually become complacent. Moreover, the likelihood of them taking adverse actions increases as they know that they will get compensation for such actions’ adverse outcomes. This is called a moral hazard. Offering insurance to all individuals is a limitation because then the insurance providers and the government cannot track the insured and must cover the costs of their immoral actions.

Besides this issue, people also criticize some of these government-backed programs, for example, social security, saying that they put further burden on a nation’s employed youth owing to the total number of retired persons who are beneficiaries.

Some more noteworthy disadvantages of such programs are as follows:

  • One cannot straightforwardly renounce insurance.
  • These programs can be very expensive.
  • They might involve a lot of paperwork.

Social Insurance vs Social Security vs Social Assistance

Fully understanding the concepts of social security, insurance, and assistance may not be easy as some overlap in their features might make it confusing for one new to such topics. That said, their distinct features can help individuals know their critical differences.

Social InsuranceSocial SecuritySocial Assistance
This refers to government-controlled programs that protect persons from economic risks.It refers to monetary assistance offered by the state to people with insufficient or no earnings.This non-government or government action involves transferring resources to individuals whose vulnerability justifies some kind of entitlement.
This government imitative aims to safeguard one from hunger and want.Social security aims to eliminate diseases, exploitation, and squalor besides hunger and want.Usually, social assistance is a government program that focuses on the economic and sometimes social welfare of unemployed individuals, elderly persons, etc., via pensions and other form of monetary assistance.
One must make regular payments to get the benefits of such programs.This is a compulsory payment one makes to the governmentTypically, social assistance does not require one to make compulsory payments.

Social Insurance vs Private Insurance

The primary similarity between social and private insurance programs is that they offer coverage to persons from all kinds of eventualities, provided they make the required contributions. That said, one must remember that they have more differences than similarities. Let us look at the table below to understand how they differ.

Social InsurancePrivate Insurance
Generally, social insurance programs focus more on every participant’s social sufficiency of benefits.Generally, the design of such programs puts more focus on the equity between individual coverage purchasers.
Typically, participating in such a program is compulsory.Individuals voluntarily participate in a private insurance program.
Generally, in this case, a statute and not a contract forms the basis of one’s rights to benefits. This means the program’s provisions can only change if the modification of the statute occurs.In this case, one’s right to benefits is contractual.
In most cases, full funding of the program does not occur.Individually bought private insurance has to be fully funded.

Frequently Asked Questions (FAQs)

1. How to get a social insurance number?

The process of getting this number varies from one nation to another. For example, in Canada, one can apply for the number via mail or by visiting a Service Canada Centre. Also, individuals must note that they can upload their digital documents securely if they apply online.

2. Can I change my social insurance number?

No, individuals cannot change the number. That said, they are able to apply for a new social insurance or SIN number if someone utilized the existing number fraudulently.

3. How did social insurance start?

Otto von Bismarck, a German Chancellor, introduced such programs in 1883. It included government-offered health insurance and rounded the benefits with retirement benefits and compensation. Once it started, other European countries quickly followed the lead of Germany.

4. Is the social insurance program effective?

Yes, such programs are effective. According to Brookings Institution, this form of insurance has significantly reduced policy rates in the United States.

This has been a guide to Social Insurance & its meaning. We explain its examples, benefits, types, criticisms, and comparison with social security. You can learn more about it from the following articles –

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