Chapter 9- Social Insurance Social Security and Unemployment Insurance Public economics
1 Chapter 9 – Social Insurance I: Social Security and Unemployment Insurance Public Economics
Social Insurance Programs Generally share 4 characteristics Participation is mandatory Eligibility and benefits depend on prior contributions Benefits begin with an identifiable occurrence Programs are not means-tested
2 Social Insurance Programs • Generally share 4 characteristics: – Participation is mandatory – Eligibility and benefits depend on prior contributions – Benefits begin with an identifiable occurrence – Programs are not means-tested
Why have Social Insurance? Recall that the first welfare theorem concluded that private markets generally work well One critical difference in insurance markets is asymmetric information -one party has information that is not available to the other party
3 Why have Social Insurance? • Recall that the First Welfare Theorem concluded that private markets generally work well. • One critical difference in insurance markets is asymmetric information – one party has information that is not available to the other party
Why have Social Insurance? If a private firm offers insurance and cannot observe the high risks from the low risks, likely to get a group of buyers that is adverse to its interests Adverse selection- Individual who knows he is especially likely to collect benefits will have an especially high demand for insurance
4 Why have Social Insurance? • If a private firm offers insurance and cannot observe the high risks from the low risks, likely to get a group of buyers that is adverse to its interests. • Adverse selection – Individual who knows he is especially likely to collect benefits will have an especially high demand for insurance
Why have Social Insurance? In a perfectly competitive insurance market, expected profits will be driven down to sO Adverse selection could lead to insurance plans losing money, and raising the premiums only exacerbates the adverse selection problem
5 Why have Social Insurance? • In a perfectly competitive insurance market, expected profits will be driven down to $0. • Adverse selection could lead to insurance plans losing money, and raising the premiums only exacerbates the adverse selection problem
Why have Social Insurance? How can government intervention improve efficiency? Social insurance programs are compulsory the adverse selection problem is avoided because the low risks are forced to purchase the insurance policy as well In the private market, the low risks would be less likely than the high risks to purchase the insurance policy
6 Why have Social Insurance? • How can government intervention improve efficiency? – Social insurance programs are compulsory: the adverse selection problem is avoided because the low risks are forced to purchase the insurance policy as well. – In the private market, the low risks would be less likely than the high risks to purchase the insurance policy
Why have Social Insurance? Other justifications Lack of Foresight / Paternalism For example, some individuals do a poor job of planning for their retirement Moral hazard “ Gaming the system Economize on Decision-making costs Income distribution
7 Why have Social Insurance? • Other justifications – Lack of Foresight / Paternalism • For example, some individuals do a poor job of planning for their retirement. – Moral Hazard • “Gaming the system” – Economize on Decision-making costs – Income distribution
Structure of Social Security Many details of Social Security laid out in the following slides One motivation for presenting these details is that virtually all college students are affect by Social Security, thus, it is important to understand the details
8 Structure of Social Security • Many details of Social Security laid out in the following slides. • One motivation for presenting these details is that virtually all college students are affect by Social Security, thus, it is important to understand the details
Structure of Social Security Basic Components Pay-as-you-go Financing Explicit transfers Benefit structure Age at which benefits are withdrawn Recipient's family status Financing
9 Structure of Social Security: Basic Components • Pay-as-you-go Financing • Explicit transfers • Benefit structure • Age at which benefits are withdrawn • Recipient’s family status • Financing
Structure of Social Security Basic Components Pay-as-you-go Financing Benefits for current retirees come from payments made by current workers Early recipients received very high returns on their contributions 10
10 Structure of Social Security: Basic Components • Pay-as-you-go Financing – Benefits for current retirees come from payments made by current workers. – Early recipients received very high returns on their contributions
