Social Insurance And Disability

Government-sponsored programs such as Social Security (Officially called Old Age, Survivors and Disability Insurance or OASDI), Medicare, Workmen’s Compensation, and Unemployment Compensation are often called social insurance instead of welfare because of their utilization of some of the techniques of private insurance. For example, there is a pooling of similar risks, the individual’s uncertainty is replaced by a degree of certainty for a small premium (paid either by the insured, his employer, or both), funds are accumulated for the payment of losses, and losses are predictable within limits depending upon the type of social insurance. 

Important differences exist, however, between social insurance and private insurance. Basically their objectives are different. Social insurance seeks to guarantee a measure of economic security to the bulk of the population or to certain segments of the population which lack adequate economic security. Therefore, the benefits payable through social insurance are geared more to assuring a minimum standard of living than to matching the premiums paid. As a result, the benefits are not in direct proportion to premiums paid as in private insurance. In short, social need is stressed over private equity. 

Benefits and premiums can be changed by legislation under social insurance whereas they are prescribed by contract under private insurance. Thus social insurance benefits and premiums are not always in strict accordance with actuarial soundness. Costs are more difficult to estimate, especially for coverages such as unemployment compensation, thus making private underwriting of such risks hazardous. 

Since participation in social insurance programs is usually compulsory, there is no selection process, nor is there fear of not achieving large enough numbers to assure a good spread of the risk. Such plans do not have to be sold to prospects, nor do underwriters have to determine which applicants to accept or to reject. As a result, social insurance programs have some cost advantages over private programs.