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Male nurse and women giving support to a senior man in doing walking exercise with walker during rehabilitation." width="2134" height="1404" />Male nurse and women giving support to a senior man in doing walking exercise with walker during rehabilitation." width="2134" height="1404" />
Robert Longley is a U.S. government and history expert with over 30 years of experience in municipal government and urban planning.
Published on January 26, 2022Social insurance is a process by which government programs ensure that groups of people are protected against financial problems arising from what President Franklin D. Roosevelt called the “vicissitudes” of life such as physical disability, loss of earnings in old age, being laid off, and other setbacks. Social insurance programs also help people meet their basic needs and gain the skills and services they need to enter or re-enter and succeed in the workforce.
In its most commonly recognized forms, social insurance is a set of government programs into which workers and often their employers pay dedicated taxes to support the programs during the years the workers remain employed. The workers are then paid benefits based on their total contributions to the programs when they reach retirement age, become disabled, are laid off, or experience other qualifying life events. By design, such programs provide economic security in the short-term or provide services and benefits to improve economic opportunity in the long-term.
A broader definition of social insurance includes both those tax-supported programs, such as Social Security, and other programs, including income tax credits, designed to provide income support, help people secure or afford necessities such as food, housing, and health-care coverage, and provide benefits or services to improve economic opportunities such as education and job training, and child care.
This broader definition includes both “universal” and “targeted” social insurance programs. Universal programs are open to otherwise eligible individuals and families no matter their income. Targeted programs, such as the Supplemental Nutrition Assistance Program (food stamps) and low-income housing assistance, have upper-income limits on eligibility. Other targeted programs, such as Veteran’s Benefits, the Government Employee Retirement Systems are available only to specific groups. There are currently no universal programs that are open to all people regardless of age, income, citizenship status, or other restrictions.
At some point in their lives, practically everyone in the United States will benefit directly from one or more social insurance programs. Beyond their direct benefit, everyone benefits indirectly from social insurance—either from the confidence that comes from knowing that it will be there to help them during unexpected or unavoidable hardships or simply because the system helps to support the overall economy.
The most recognizable social insurance programs currently available in the United States are Social Security, Supplemental Security Income (SSI), Medicare, Medicaid, and Unemployment Insurance.
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Created during the Great Depression of the 1930s to promote the economic security of the nation’s people, Social Security provides qualified individuals with a guaranteed source of income when they retire or can’t work due to a disability. Though it is best known for retirement benefits, Social Security also provides survivor benefits to the legal dependents (spouse, children, or parents) of deceased workers. While people work they pay Social Security taxes. This tax money goes into a trust fund that pays the program’s various benefits.
To qualify for Social Security retirement benefits, workers must be at least 62 years old and have paid taxes into the system for at least 10 years. Workers who wait to collect Social Security, up to age 70, receive higher monthly benefits. In 2021, the average Social Security retirement benefit was $1,543 a month.
The Supplemental Security Income (SSI) program provides monthly payments to adults and children who are legally blind or disabled and have low income and resources. While the Social Security Administration administers the program, SSI is funded by general tax revenues rather than the Social Security taxes paid by workers.
To be eligible to receive SSI benefits, a person must be 65 or older, blind or disabled, a U.S. citizen or lawful permanent resident, and have very limited income and financial resources.
In 2022, the standard maximum allowable limit for income was up to $841 a month for an individual or $1,261 a month for a couple. These were also the maximum monthly benefit payments for SSI recipients. The average SSI payment in 2021 was $586 for adults and $695 per month for children.
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Medicare is the federal health insurance program that subsidizes the cost of healthcare services for all people who are 65 or older, certain younger people with disabilities, or people with End-Stage Renal Disease, or Lou Gehrig's disease (ALS).
Medicare is divided into different “parts” that cover a variety of healthcare situations, some of which come at a cost to the insured person in the form of copays or deductibles:
While most people on Medicare pay no monthly premium for Part A coverage, all members pay a monthly premium for Part B. In 2021, the standard Part B premium amount was $148.50.
In general, any person who has lived in the United States legally for at least five years and is 65 or older qualifies for Medicare coverage. Anyone who is receiving Social Security benefits is automatically enrolled in Medicare Parts A and B when they reach age 65. Part D coverage is optional and enrollment must be done by the individual.
Medicare Advantage plans are Medicare-approved healthcare plans available from private insurance companies that “bundle” Part A, Part B, and usually Part D. These plans may offer some extra benefits that traditional Medicare doesn’t cover, such as vision, hearing, and dental services.
Medicaid provides health coverage to over 72 million Americans, including eligible low-income adults, children, parents, pregnant women, elderly adults, and people with disabilities. Though administered by the individual states, Medicaid is funded jointly by states and the federal government. Medicaid is currently the single largest source of health coverage in the United States. In 2018, for example, Medicaid was the source of payment for over 42% of all births in the nation.
To offer Medicaid benefits to their citizens, states are required by federal law to cover certain groups of individuals. Low-income families, qualified pregnant women and children, and individuals receiving Supplemental Security Income are examples of such mandatory eligibility groups. The states also have the option of covering other groups, such as people receiving home and community based services and children in foster care who are not otherwise eligible.
Enacted in 2010, the Patient Protection and Affordable Care Act created the opportunity for states to extend Medicaid coverage to nearly all low-income Americans under age 65.
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With the costs and administration of the program shared by the federal and state governments, the Unemployment Insurance (UI) program provides weekly benefits to eligible workers who become unemployed through no fault of their own. Unemployment compensation provides jobless workers with a source of income until they are re-hired or find another job. To qualify for unemployment compensation, jobless workers must satisfy certain criteria such as actively looking for work. In being funded totally by either federal or state taxes paid by employers, the UI program is unique among U.S. social insurance programs.
In times of a stable economy, most states offer unemployment benefits for up to 26 weeks or half a year. During times of high unemployment, such as during the COVID-19 pandemic, benefits might be extended beyond 26 weeks.
The basic idea behind social insurance is that it makes benefits available to all members of various groups—all people age 65 and older, for example. Private insurance, in contrast, pays benefits only to those individuals who choose to purchase it.
However, social insurance programs differ from private insurance plans in many other ways. For example, individual participants’ contributions to social insurance programs are mandatory and taken automatically by the government as a form of tax. With private insurance, policyholders pay monthly premiums to secure benefits and are free to purchase policies that suit their budget and coverage requirements.
In general, private insurance programs are designed to offer a wider range of coverage than social insurance programs, with the level of that coverage based on the amount of the contribution made. For example, a wealthy person with a more expensive comprehensive policy would be covered against all eventualities, whereas someone with a basic policy might find themselves refused coverage in certain cases, such as treatment for medical issues caused by their own negligence.
In private insurance programs, the right to payment of benefits is based on a binding contract between the policyholder and the insurer. The insurance company does not have the right to change or terminate coverage before the end of the contract period, except in cases such as failure to pay premiums. In social insurance programs, however, rights to benefits are based on laws enacted by the government rather than on mutually enforceable private contracts. As a result, the provisions of social insurance programs can be changed whenever the law is amended. In 1954, for example, the U.S. Congress amended the Social Security Act to extend retirement benefits to self-employed farmers. Today, Congress is struggling with legislation to shore up the Social Security trust fund, which if depleted by 2033 as now projected, would greatly reduce benefit payments for all retired and disabled beneficiaries.
Since first emerging in Germany during the 1880s and in the United States in 1935, with the enactment of the Social Security Act, social insurance programs have been justified and criticized by sociologists, politicians, and taxpayers.
Most social insurance programs are justified by their contribution to fulfilling the “social contract”—the 16th century Hobbesian philosophy that members of a society must agree to cooperate to secure mutual social benefits. Social insurance is seen as socially responsible because it draws on the empathetic human desire to help people deal with hardships that are neither their fault nor within their control.
Social Security, for example, is viewed as an agreement between generations and between the healthy and the unwell. Knowing that they too might eventually need its benefits, working people pay a tax now to help meet the health care and living costs of those who are temporarily incapacitated through sickness or who have ceased work due to advancing age.
Social insurance is further based on the modern premise that since in competitive economies, wealth, resources, or benefits will rarely be equitably distributed, there must be provisions to ensure that participants in the market do not end up in an “all-or-nothing” situation. Participants in a healthy capitalist economy must be free to take risks and engage in economic activity without fearing that they might face poverty in the instance of disability or old age. In this manner, Social Security and similar social insurance programs help protect the economy while providing “social order.”
The premiums required to fund social insurance programs come from taxes paid by workers who will ultimately be covered by the program’s benefits. The resulting sense of accountability makes the program seem fair and its beneficiaries deserving of its benefits.
The United States is the only country that does not fully fund its social insurance programs on an ongoing basis without consideration of their future liabilities. Instead, the largest U.S. social insurance programs, Social Security and Medicare, are structured to collect more in taxes than they pay out in benefits. The difference is retained in trust funds dedicated to ensuring the programs’ ability to pay benefits up to 70 years in the future.
Increasing life expectancy negatively impacts Social Security’s ability to pay long-term future benefits. For example, in 1940, only 9 million Americans reached age 65, then full retirement age. In 2000, by comparison, nearly 35 million did so. As more people live to reach full retirement age (now 67), the ability of the Social Security trust fund to pay full benefits is strained. Alternatives include increasing the payroll tax rate or raising the retirement age. While Social Security maintains a considerable surplus—$2.91 trillion in 2020—political rhetoric often contends that the program is “going bankrupt” or that Congress too often spends the surplus money on other things.
In 2019, the federal government spent $2.7 trillion, or about 13% of the U.S. gross domestic product, on social insurance programs. Social Security alone accounted for $1.0 trillion of the total expenditure, or 23% of the total federal budget. Combined expenditures for health insurance programs amounted to $1.1 trillion, or 26% of the federal budget.
Social insurance programs are often plagued by costs arising from fraudulent or otherwise improper payment of benefits or claims. It has been estimated that Social Security fraud alone costs taxpayers millions, and possibly billions, of dollars each year. Fraudulent Social Security activities include collecting retirement or disability benefits by persons who are not qualified to receive them. In fiscal year 2019, the Social Security Administration estimates that it made about $7.9 billion worth of “improper payments,” which includes everything from innocent mistakes to willful fraud.
Another criticism of social insurance is its so-called “moral hazard.” People who are secure in the knowledge that they are insured against virtually all future eventualities may become more likely to take potentially hazardous actions. Because the government provides insurance to virtually everyone, it cannot monitor the insured and is forced to pay the costs of their immoral actions.
In the case of unemployment benefits, the moral hazard requires that individuals only be partially insured against unemployment. This is because history has shown that when unemployed workers are fully compensated, they lack any incentive to look for work. Instead, benefits paid to workers during unemployment must be only a fraction of their previous salary and paid only while they are actively seeking employment.
While programs like unemployment insurance and workers’ compensation have obvious social and economic benefits, they also negatively affect the labor supply by encouraging workers to remain out of work as long as possible. To prevent being crippled by fraudulent claims for benefits, the programs are burdened by the costly tasks of determining whether workers became unemployed due to unavoidable circumstances or by choice and of monitoring the validity of their required ongoing job search.
In recent years, the complaint, “For the government to call Social Security an entitlement is an outrage! It’s an earned benefit!” has spread in social media and email. It is, of course, less of an outrage than a misunderstanding. While its benefits are indeed earned, Social Security is an entitlement program. In the language of government spending an “entitlement” is any type of program in which recipients automatically receive benefits that they're eligible for based on the applicable legislation, in this case, the Social Security Act. This is very different from the use of the term in a negative sense, as when used to describe persons who consider themselves “entitled” to privileges not deserved by others.
Social Security is an entitlement program because everyone who meets the eligibility criteria (currently 40 combined “quarters” of eligible earnings) is entitled to a benefit. No one has to depend on Congress to appropriate spending in the federal budget every year to receive their Social Security benefit checks.
By comparison, the HUD Housing Choice Vouchers Program is an example of a program that is not an entitlement. The vouchers help very low-income families, the elderly, and the disabled afford decent and safe housing. As opposed to entitlement programs, Congress appropriates a certain sum of money for housing vouchers regardless of whether it's enough to give benefits to everyone who meets the eligibility criteria. Persons applying to receive benefits are placed on waiting lists because the number of people seeking benefits far outstrips the funds available.
