“Social Insurance,” Risk Spreading, and Redistribution

James Kwak, “‘Social Insurance,’ Risk Spreading, and Redistribution,” in Daniel Schwarcz and Peter Siegelman, eds., Research Handbook in the Law and Economics of Insurance (Edward Elgar, 2015)

Abstract

Social Security, Medicare, unemployment insurance, and a poorly defined group of similar programs are often called “social insurance.” Social insurance is most often thought of as (a) insurance schemes in which workers make payroll tax contributions and receive benefits following certain insured events or (b) government responses to failures in private insurance markets. Both of these conceptualizations, however, fail to accurately describe some of the programs that are generally considered as social insurance. In this paper, I show that these programs have the following property: in the short term, they are clearly redistributive because we know the relevant outcomes and therefore who will make contributions and who will receive benefits; but in the long term (over one’s lifetime), they spread risk because we do not know what outcomes will occur and therefore who will benefit from the insurance they provide. I propose a new conceptualization of social insurance as government interventions in insurance markets that are redistributive in the short term but that, seen from a lifetime perspective, most people would choose to participate in because of their insurance value. At the margins, it is difficult to define the limits of social insurance. At one extreme, government regulation of automobile liability insurance and individual health insurance imposes risk spreading and redistribution that would not occur in a private market; at the other, public assistance programs such as Medicaid have insurance value for people who do not know what income category they will fall in. The definition of social insurance will always be politically contested because there is no clearly correct timeframe to use when evaluating these programs; proponents can frame social insurance as long-term insurance that benefits most participants, while opponents can frame it as naked redistribution from “makers” to “takers,” without either being obviously wrong.

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June 2014 version: Kwak, Social Insurance, Risk Spreading, and Redistribution (2014-06)

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