This is a selection from the book by John K. DiMugno, Stephen Plitt, and Dennis J. Wall, titled "Catastrophe Claims: Insurance Coverage for Natural and Man-Made Disasters," Chapter 18A by Dennis J. Wall (©May 2017, Thomson Reuters). This selection is reprinted with permission of Thomson Reuters. Any further reproduction without the consent of the publisher is expressly prohibited.
Insurance. The final feature of Social Security to be addressed here is its most important feature. Social Security was established as insurance. It was not the dole in the Great Depression, and it is not an unearned benefit now.
Social Security does not resemble established notions of property and casualty insurance. Social Security is more like an annuity, payable at fixed times. The contributions workers make out of their paychecks are the equivalent of paying the insurance premiums.[1]
As has always been the case with private insurance, the first question to ask before issuing an insurance policy is the nature of the risk to be assumed by the insurance company. The risk assumed under Social Security old-age insurance was clear from the beginning. "Risks insured against: ... Loss of earning capacity through old age, old age being defined [at the outset of the program] as the age of 65 years or over."[2]
Another, more recent description of the risks to be insured against is that "the general purpose of the old-age, survivors', and disability insurance provisions of the statute is to protect workers and their dependents from the risk of loss of income due to the insured's old age, death, or disability."[3]
Parenthetically, risk of loss of income from old age was precisely focused on loss of income from work by workers, because labor is interrupted by old age, death, or disability, whereas "the receipt of income from the investment of capital" is not affected nearly as much, if at all, by these events.[4]
In this regard, Social Security old-age insurance was designed to share a significant feature of private annuities, which is that payment would begin when a condition in the insurance contract was fulfilled by the holder of the annuity, or in the case of Social Security old-age insurance, by the employee. "The old-age insurance program required retirement from gainful employment as a condition of benefit receipt."[5]
In the Social Security old-age insurance framework, national scope is a manifestation of all insurance underwriting, namely, spreading the risk:
In economic and actuarial terms, a social insurance system would be most efficient if it covered the area of a national economy. Insurance administration is basically a routine operation for which unit costs decline with increasing size. Even in the more complex field of private life insurance, companies of great size have been outstandingly successful. The risks of old age, death, survivorship, disability and unemployment can be better averaged over a wider area. In a limited reserve system in which mutually offsetting flows of contributions and benefit payments are depended upon heavily in current financing, a wider averaging of risks is very important.[6]
The chief difference between private insurance and social insurance like Social Security lies in how they respectively handle the requirements of reserves. Private insurance in general terms requires that insurance companies post reserves, meaning amounts of money sufficient to pay an amount of claims established by a regulator according to actuarial and other guidelines generally based on experience.
Next: Social Security Reserves to Summing Up Section 18A:1: Social Security: What purposes did the people who wrote it think they were serving.
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[1] In this sense, the persistent myth that Social Security old-age insurance was put into place in order to move older workers out of the workforce, denies the "risk-sharing inherent in insurance schemes." In the case of Social Security old-age insurance, the shared risk is that "one must retire in order to receive a retirement benefit because loss of earnings is the insured condition." Larry DeWitt, SSA Historian, "Special Study #7: The History and Development of the Social Security Retirement Earnings Test" (August 1999), available online at https://www.ssa.gov/history/ret2.html, last accessed on Monday, January 9, 2017.
[2] Barbara Armstrong, "Invalidity and Old Age Insurance" (unpublished paper, written in August, 1934) (emphasis in original), quoted by Larry DeWitt, SSA Historian, in "Special Study #7: The History and Development of the Social Security Retirement Earnings Test" (August 1999), available online at https://www.ssa.gov/history/ret2.html, last accessed on Monday, January 9, 2017.
Professor Barbara Armstrong was a Professor of Law and Economics at the University of California School of Law at the time. Like many other persons involved in designing the Social Security old-age insurance program, she had previously written a book on the subject of social insurance. Her concentration was on designing old-age insurance in the then-to-be-developed Social Security program.
Professor Armstrong brought her expertise in that area to bear as one of three consultants on old-age insurance on the Technical Committee attached to the Committee on Economic Security (CES) beginning in 1934. The CES was appointed by President Roosevelt to design the Social Security program.
[3] 1 Soc. Sec. L. & Prac. § 1:1, "Nature of Social Security Act" (Thomson Reuters, December 2016 Update).
[4] 1 Soc. Sec. L. & Prac. § 1:1, "Nature of Social Security Act" (Thomson Reuters, December 2016 Update).
[5] Larry DeWitt, SSA Historian, in "Special Study #7: The History and Development of the Social Security Retirement Earnings Test" (August 1999), available online at https://www.ssa.gov/history/ret2.html, last accessed on Monday, January 9, 2017. (Emphasis added.)
[6] J. Douglas Brown, Sidney Hillman memorial lecture at the University of Wisconsin delivered on November 18, 1955, combined in part with a lecture delivered at Social Security Headquarters in Baltimore, Maryland on November 7, 1957, "published in 1972," titled, "The American Philosophy of Social Insurance," accessible online at https://www.ssa.gov/history/brown2.html, last accessed on Monday, January 9, 2017. (Emphasis added.)
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