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 (although additional sources of funding may be provided as well); and
- the program serves a defined population, and participation is either compulsory or the program is heavily enough subsidized that most eligible individuals choose to participate.1
Social insurance has also been defined as a program where risks are transferred to and pooled by an organization, often governmental, that is legally required to provide certain benefits.2
In the U.S., programs that meet these definitions include Social Security, Medicare, the PBGC program, the railroad retirement program and state-sponsored unemployment insurance programs.1 The Canada Pension Plan (CPP) is also a social insurance program.
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.3
Differences from private insurance
Typical differences between private insurance programs and social insurance programs include:
- Equity versus Adequacy: Private insurance programs are generally designed with greater emphasis on equity between individual purchasers of coverage, while social insurance programs generally place a greater emphasis on the social adequacy of benefits for all participants.
- Voluntary versus Mandatory Participation: Participation in private insurance programs is often voluntary, and where the purchase of insurance is mandatory, individuals usually have a choice of insurers. Participation in social insurance programs is generally mandatory, and where participation is voluntary, the cost is heavily enough subsidized to ensure essentially universal participation.
- Contractual versus Statutory Rights: The right to benefits in a private insurance program is contractual, based on an insurance contract. The insurer generally does not have a unilateral right to change or terminate coverage before the end of the contract period (except in such cases as non-payment of premiums). Social insurance programs are not generally based on a contract, but rather on a statute, and the right to benefits is thus statutory rather than contractual. The provisions of the program can be changed if the statute is modified.
- Funding: Individually purchased private insurance generally must be fully funded. Full funding is a desirable goal for private pension plans as well, but is often not achieved. Social insurance programs are often not fully funded, and some argue that full funding is not economically desirable.3
See also
References
- ^ a b "Social Insurance", Actuarial Standard of Practice No. 32, Actuarial Standards Board, January 1998.
- ^ Margaret E. Lynch, Editor, Health Insurance Terminology, Health Insurance Association of America, 1992, ISBN 1-879143-13-5.
- ^ a b Robert J. Myers, Social Security, Third Edition, Richard D. Irwin, Inc., 1985, ISBN 0-256-03307-2.
