Social Insurance

Social Insurance

Social insurance has three main general economic advantages over private insurance. First the underwriting costs may be lower because larger numbers share the risks. Secondly, the administrative costs of collecting premiums, paying benefits, keeping records, etc., may be lower because of the larger scope for standardization of forms, rules, etc. Thirdly, in pension benefits there is no difficulty in tracing employees who change jobs in their working lives so that there is no discouragement to mobility of labour; this is more difficult to arrange in private pension schemes because employers usually install them to discourage employees from moving.

There are several main economic disadvantages of social insurance compared with private insurance. First, standardization prevents social insurances from being adapted to the circumstances or preferences of firms or individuals. For example, 'flat rate' contributions for ill health and .unemploymentinsurance do not vary with the risk of accident or .unemploymentin different jobs, firms or industries; contributions for pension benefits do not allow for the different ages of retirement that might be desirable in, say, mining and accounting. Secondly, compulsory contributions probably reduce private saving (for pension benefits) that tends to be invested in the more progressive and profitable firms. Thirdly, in Britain and some other countries, social insurance is no longer based on a fund accumulated out of contributions but on the taxing power of the state; it is therefore subject to the risk of arbitrary political decision. Fourthly, social insurance requires high taxation which may discourage incentive and reduce the incomes out of which the contributions for it are paid. Fifthly, it employs scarce political and administrative resources that might be put to other uses.

A further economic effect is that since social insurance contributions are (with one exception) a form of poll tax that does not vary with income within each sex or age group, they are regressive. Some economists believe this has economic drawbacks since it intensifies inequalities in income and therefore in opportunities generally. Others believe it has advantages in emphasizing the costs of state welfare. Recent statistics for Britain suggested that households with middling incomes are paying about as much in taxes (including local rates) and social insurance contributions as they receive in social benefits as a whole.

The exception to the flat-rate contributions is the contribution (to a pension benefit) graduated according to earnings (within a defined range) in Britain and some other countries. The proposal has been made that the sickness and .unemploymentcontributions and benefits should also be graduated so that they become (within the earnings range) more nearly proportioned or progressive. This raises the question whether social insurance is intended to ensure minimum standards in sickness, .unemploymentor retirement so that individuals need not become dependent on others, or the maintenance during such periods of customary or habitual modes of living, and if the latter whether the additional insurance of people with higher income must be made through the state or could be made through competitive insurance organizations. These issues are partly social and political as well as economic.

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