Social insurance - AbsoluteAstronomy.com

Social insurance is any government

Government

Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...

-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
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...

and expense
Expense
In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...

s (often through a trust fund
Trust law
In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...

);
it is funded by tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

es 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.

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.

In the U.S., programs that meet these definitions include Social Security

Social Security (United States)

In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...

, Medicare

Medicare (United States)

Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other...

, the PBGC

Pension Benefit Guaranty Corporation

The Pension Benefit Guaranty Corporation is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and...

program, the railroad retirement

Railroad Retirement Board

The U.S. Railroad Retirement Board is an independent agency in the executive branch of the United States government created in 1935 to administer a social insurance program providing retirement benefits to the country's railroad workers....

program and state-sponsored unemployment insurance programs. The Canada Pension Plan

Canada Pension Plan

The Canada Pension Plan is a contributory, earnings-related social insurance program. It forms one of the two major components of Canada's public retirement income system, the other component being Old Age Security...

(CPP) is also a social insurance program.

Similarities to private insurance

Typical similarities between social insurance programs and private insurance

Insurance

In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...

programs include:

Wide pooling of risks
Risk pool
A risk pool is one of the forms of risk management mostly practiced by insurance companies. Under this system, insurance companies come together to form a pool, which can provide protection to insurance companies against catastrophic risks such as floods, earthquakes etc. The term is also used...

;
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.

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
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

. 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
Statute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...

, 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.

Similarities to private insurance

Differences from private insurance

See also