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CHAPTER 2
SOCIAL INSURANCE

Lecturer: Nguyen Xuan Tiep, MSc.

Graduate School; Faculty of Insurance – NEU
tiepnx@neu.edu.vn

Content
2.1. Introduction to Social Insurance
2.1.1. History of Social Insurance
2.1.2. Characteristics of Social Insurance
2.1.3. Social Insurance Models
2.2. Types of Social Insurance Benefits
2.2.1. Retirement Benefit
2.2.2. Survivor’s Benefit
2.2.3. Disability Benefit
2.2.4. Others
2.3. Social Security Premium/Taxes
2.3.1. Different between Premium and Taxes
2.3.2. How to determine Premium/taxes

Connection:
Global Risk E-commerce Risk Car Crash Risk Terrorism Risk

Injury Liability Risk Death Risk Disability Fire Risk

Risk Risk

Illness “Living Too Long” Weather Investment Risk

Risk Risk Catastrophe Risk

Intellectual Innovational Technical Regulatory Risk

Property Risk Risk Obsolescence Risk

Environmental Risk Political Risk Natural Disaster Risk

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Connection:
Social Security
• There are many government programs designed to provide economic
security for individuals and families.

• Both public assistance (welfare programs) and social insurance

purpose of reducing want and destitution.

• Public assistance programs have a role in providing economic

security. Welfare benefits are financed through general revenues that
come from state funds/budget. Benefits received from welfare are not
based on contributions made by or on behalf of the recipients

• Social insurance is compulsory, eligibility criteria and benefits are

specified by law in all countries in general, and in US in specular.

Connection

Private/ Employer Provided

Personal Insurance/
Insurance Employee Benefits

Social
Insurances

Connection: Employee Benefits

Private/personal
Insurance

Employer Provided
Insurance/
Employee Benefits

Social Insurances

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Connection
• Every employer and employee is required to
contribute in the form of payroll taxes.

• Social Insurance provides income in the event of

retirement, disability, or dead. It also provided
medical expense benefits for disable or retired
persons and their dependents.

Connection
• In term of risk management needs:
• Coverage for the risks of health, premature death, disability, and
living too long.
• The employer became the caretaker for the health needs, burial,
disability, and retirement – they receive tax incentives.

1. Introduction to Social Insurance

1. History of Social Insurance

• The existence of social insurance stems from the acceptance of the

ideology that workers should be insured against the risk of losses of
economic status due to their participation in the labour market. This
inherent idea of fairness has propagated the desirability and
subsequent durability of this program.
• Social insurance provides protection against certain risks in the
economy that private insurance fails to deal with. Private insurance
often becomes extremely unaffordable due to the issues of adverse
selection and moral hazard, and to counteract such steep prices, the
need for a publicly mandated social insurance increases.

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1. Introduction to Social Insurance

1. History of Social Insurance

• Social insurance is considered fair and socially responsible because it

taps into the human desire of wanting to help individuals who face
risks that are not their fault and neither are they in their control.
• The premiums required for the existence of social insurance policies
come from workers who will ultimately be covered by the benefits and
this sense of accountability makes the program seem fair and its
beneficiaries, deserving.
• Social insurance helps account for the lack of predictability that
individuals in the market have regarding their retirement, health and
stability and thereby insures them against long term risks that they
now no longer need to think about but are, for the most part,
inevitable.

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1. Introduction to Social Insurance

1. History of Social Insurance
• The first compulsory social insurance programs on a national scale were
established in Germany under Chancellor Otto von Bismarck: health
insurance in 1883, workmen’s compensation in 1884, and old-age and
invalidity pensions in 1889.
• Germany’s example was soon followed by Austria and Hungary. The issue
of social insurance elsewhere in Europe was dominated by a debate
between those who preferred voluntary, subsidized insurance and those
who advocated a compulsory system.
• Great Britain adopted national compulsory health insurance in 1911 and
greatly expanded it in 1948.
• After 1920, social insurance on a compulsory basis was rapidly adopted
throughout Europe and in the Western Hemisphere.
• The United States lagged behind Europe; until 1935, with the passage of
the Social Security Act, government insurance programs were exclusively
the responsibility of state or local governments. The three federal
insurance programs adopted in the United States since 1935 provide
retirement and survivor benefits, health care for persons over 65, and
insurance against disability.

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1. Introduction to Social Insurance

2. Definition of Social Insurance
• Social insurance is a concept where the government intervenes in
the insurance market to ensure that a group of individuals are
insured or protected against the risk of any emergencies that lead
to financial problems. This is done through a process where
individuals' claims are partly dependent on their contributions,
which can be considered as insurance premium to create a
common fund out of which the individuals are then paid benefits in
the future.

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1. Introduction to Social Insurance

2. Definition Social Insurance
• Definition:
• public insurance program that provides protection against various
economic risks (e.g., loss of income due to sickness, old age, or
unemployment) and in which participation is compulsory. Social
insurance is considered to be a type of social security (q.v.), and in
fact the two terms are sometimes used interchangeably.

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1. Introduction to Social Insurance

2. Definition Social Insurance
• Social insurance has also been defined as a program whose risks are
transferred to and pooled by an often government organization legally
required to provide certain benefits.
• Social insurance is a public insurance that provides protection against
economic risks. Participation in social insurance is compulsory. Social
insurance is considered to be a type of social security.

• WB considers the appropriateness of traditional social

insurance models that are based on steady wage employment
in light of persistently large informal sectors in developing
countries and the decline in standard employer-employee
relationships in advanced countries (The World Bank, 2019, World
Bank Report on The Changing Nature of Work)

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1. Introduction to Social Insurance

2. Definition Social Insurance
• Social insurance is a public insurance that provides protection against
economic risks. Participation in social insurance is compulsory. Social
insurance is considered to be a type of social security.
• Social insurance differs from public support in that individuals' claims are
partly dependent on their contributions, which can be considered as
insurance premium. If what individuals receive is proportional to their
contributions, social insurance can be considered a government
"production activity" rather than redistribution. Given that what some
receive is far higher than what they attribute (on an actuarial basis), there
is a large element of redistribution involved in government social
insurance programs.

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1. Introduction to Social Insurance

3. Characteristics of Social Insurance
Social insurance programs in the United States have certain
characteristics that distinguish them from other government
insurance programs:
 Compulsory programs
 Floor of income
 Emphasis on social adequacy rather than individual equity
 Benefits loosely related to earnings
 Benefits prescribed by law
 No means test
 Full funding unnecessary
 Financially self-supporting

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1. Introduction to Social Insurance

3. Characteristics of Social Insurance
Compulsory programs (with few exceptions, social insurance
programs are compulsory):
 Advantages:
 The goal of providing a floor of income to the population can be achieved
more easily.
 Adverse selection is reduced, because both healthy and unhealthy lives are
covered.
 In a large program that is compulsory, fewer random or accidental
fluctuations in loss experience are likely to occur, and the necessity of
providing margins in contingency reserves is reduced.

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1. Introduction to Social Insurance

3. Characteristics of Social Insurance
Social insurance programs in the United States have certain
characteristics that distinguish them from other government
insurance programs:
 Compulsory programs
 Floor of income
 Emphasis on social adequacy rather than individual equity
 Benefits loosely related to earnings
 Benefits prescribed by law
 No means test
 Full funding unnecessary
 Financially self-supporting

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1. Introduction to Social Insurance

3. Characteristics of Social Insurance
Floor of income
 Social insurance programs are generally designed to provide only a floor
of income with respect to the risks that are covered. Most persons are
expected to supplement social insurance benefits with their own personal
program of savings, investments, and private insurance.
 The concept of a floor of income is difficult to define. One extreme view
is that the floor of income should be so low as to be virtually nonexistent.
Another extreme view is that the social insurance benefit by itself should
be high enough to provide a comfortable standard of living, so that private
insurance benefits would be unnecessary. A more realistic view is that
social insurance benefits, when combined with other income and financial
assets, should be sufficient for most persons to maintain a reasonable
standard of living. Any group whose basic needs are still unmet would be
provided for by supplemental public assistance (welfare) benefits.

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1. Introduction to Social Insurance

3. Characteristics of Social Insurance
Emphasis on social adequacy rather than individual equity:
 Social adequacy means that the benefits paid should provide a certain
standard of living to all contributors. This means that the benefits paid are
heavily weighted in favor of certain groups, such as low-income persons,
large families, and the presently retired aged.
 In technical terms, the actuarial value of the benefits received by these
groups exceeds the actuarial value of their contributions. In contrast, the
individual equity principle is followed in private insurance.
 Individual equity means that contributors receive benefits directly related
to their contributions; the actuarial value of the benefits is closely related
to the actuarial value of the contributions.

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1. Introduction to Social Insurance

3. Characteristics of Social Insurance
Emphasis on social adequacy rather than individual equity
(cont.):
 The basic purpose of the social adequacy principle is to provide a floor of
income to all covered persons. If low-income persons received social
insurance benefits actuarially equal to the value of their tax contributions
(individual equity principle), the benefits paid would be so low that the
basic objective of providing a floor of income to everyone would not be
achieved.

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1. Introduction to Social Insurance

3. Characteristics of Social Insurance
 Benefits loosely related to earnings:
 Benefits Loosely Related to Earnings Social insurance benefits are loosely
related to the worker’s earnings. The higher the worker’s covered earnings, the
greater will be the benefits.
 The relationship between higher earnings and higher benefits is loose and
disproportionate, but it does exist. Thus, some consideration is given to
individual equity.
 Benefits Prescribed by Law:
 Social insurance programs are prescribed by law.
 The benefits or benefit formulas, as well as the eligibility requirements, are
established by law.
 The administration or supervision of the program is performed by government.

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1. Introduction to Social Insurance

3. Characteristics of Social Insurance
No means test
 Social insurance benefits are paid as a matter of right without any
demonstration of need. A formal means test is not required.
 By contrast, applicants for social insurance benefits have a statutory right
to the benefits if they fulfill certain eligibility requirements.
 A means test is used in public assistance; welfare applicants must show
that their income and financial assets are below certain levels as a
condition of benefit eligibility.

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1. Introduction to Social Insurance

3. Characteristics of Social Insurance
Full funding unnecessary
 Social Security is not a fully funded program.
 A fully funded program means that the accumulated OASDI trust fund
assets plus the present value of future contributions will be sufficient to
discharge all liabilities over the valuation period.
 A fully funded Social Security program is unnecessary for several reasons:
 the program will operate indefinitely and not terminate in the predictable
future, full funding is unnecessary.
 the Social Security program is compulsory, new workers will always enter the
program and pay taxes to support it.
 the federal government can use its taxing and borrowing powers to raise
additional revenues if the program has financial problems.
 from an economic viewpoint, full funding would require substantially higher
Social Security taxes, which would be deflationary and cause substantial
unemployment.

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1. Introduction to Social Insurance

3. Characteristics of Social Insurance
Full funding unnecessary
 Social Security is not a fully funded program.
Social Security actuaries make cost estimates over a 75-year projection
period and even beyond. According to the 2014 Board of Trustees report,
the present value of the unfunded obligations over the 75-year period from
2014 to 2088 is $10.6 trillion. However, the combined OASDI trust fund
balance at the end of 2013 totaled about $2.8 trillion. To be fully funded, a
substantially higher trust fund balance would be required.

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1. Introduction to Social Insurance

3. Characteristics of Social Insurance
Financially Self-Supporting
 Social insurance programs in the United States are designed to be
financially self-supporting.
 This means the programs should be almost completely financed from the
earmarked contributions of covered employees, employers, the self-
employed, and interest on the trust-fund investments.

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1. Introduction to Social Insurance

3. Characteristics of Social Insurance
• The reasons specifically identify the features of a market
economy that give rise to the need for social insurance:
• Asymmetric information
• Redistribution
• Externalities

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1. Introduction to Social Insurance

4. Social Insurance Models:
• Taxes vs. Premium
• Government vs. private
• Examples of social insurance include:
• Medicare, Medicaid
• Social Insurance
• Employee Benefits
• Unemployment Insurance

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1. Introduction to Social Insurance

• The types of benefits available from Social Security in US
are:
• old age (retirement),
• survivors’,
• disability, and
• health (or Medicare) benefits (include hospital insurance and
supplemental medical insurance).
• US’s Social security can be separated into two broad
parts:
• the old-age, survivors’, disability insurance program known as
Social Security.
• Medicare.

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2. Types of Social Insurance Benefits

• Old age (retirement)
• Survivors’
• Disability
• Medicare
• Others

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2. 2. Types of Social Insurance Benefits

Coverage and Eligibility Requirements:
• Apply to more than 90% of workers in US (except railroad
workers).
• There are three levels of insured status: Fully insured,
currently insured, or disability insured.
• If the worker does not have enough work tenure to be fully
insured, she or he may be currently insured, which still
allows eligibility for some survivor benefits.

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2. 2. Types of Social Insurance Benefits

Coverage and Eligibility Requirements:
• Eligibility (Etti Baranoff (2004), p. 372):
• A person must be in the workforce for a minimum number of
quarters during which she or his or her earnings meet minimum
criteria (in 2002, the required earnings per quarter is a minimum
$870, the amount is adjusted every year).

• An employee can earn a maximum of four credits per year, even if

she or he did not work the full four quarters, as long as she or he
made enough even one month (4X$870).

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2. 2. Types of Social Insurance Benefits

Coverage and Eligibility Requirements:
• Eligibility (Etti Baranoff (2004), p. 372):
• A beneficiary is fully insured once forty credits of coverage
are earned.
• Currently insured status is achieved if the beneficiary has at
least six credits in the thirteen-quarter period ending with the
quarter of dead.
• Disability insured status: is gained by having twenty credits in
the ten years before disability begins. Less rigorous disability
requirements apply to a beneficiary who is under age 31 or
blind.

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2. 2. Types of Social Insurance Benefits

Coverage and Eligibility Requirements:
Retirement (Old Age) Benefits (Etti Baranoff (2004), p. 373):
• Who get monthly benefits if a fully insured worker retired:
• Retired worker who is at least 62 years old.
• Spouse of retired worker who either (1) has a child under age 16 or a
disabled child in his or her care or (2) is at least 62 years old; applies
also to divorced spouse if the marriage lasted at least 10 years.
• Dependent child of retired worker, either under 18, under 19 if a full-time
student, or disabled before 22.
• Normal retirement age ranges from 65 (for people born before
1938) to 67 (for those born in or after 1960).
• A fully insured worker can elect to receive full retirement benefits at
the normal retirement age, or reduced benefits as early as age 62.

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2. 2. Types of Social Insurance Benefits

Coverage and Eligibility Requirements:
• Early Retirement:
• Early retirement benefits are permanently reduced in
amount.
• Late Retirement:
• Permanently increased benefit to compensate for the
shorterned length of the pay-out period and to
encourage older workers to continue working full-time.
• No delayed retirement credit is granted for retiring past
age 69.

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2. 2. Types of Social Insurance Benefits

Coverage and Eligibility Requirements:
Survivors’ Benefits (Etti Baranoff (2004), p. 374):
• Protect the surviving dependents a fully or currently insured
deceased worker.
• Provide monthly benefits and a small lump-sum death benefit.

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2. 2. Types of Social Insurance Benefits

Coverage and Eligibility Requirements:
Survivors’ Benefits:
• Who gets monthly benefits when a fully or currently
insured worker dies:
• Dependent child of deceased worker;
• Aged widow(er) who is at least 60 years old;
• Young widow(er) who caring for a dependent child under age 16 or
disabled child;
• Disabled widow(er) who is disabled and 50 years or older
(converted to aged widow(er) upon attainment of age 65;
• Parent who was a dependent of he deceased worker and is at least
62 years old.

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2. 2. Types of Social Insurance Benefits

Coverage and Eligibility Requirements:
Disability Benefits (Etti Baranoff (2004), p. 374, 375):
• Who gets monthly benefits if a fully insured worker is
disabled:
• Disabled worker who had been working recently in coverd
employment prior to disability;
• Spouse of disabled worker either (1) has a child under age 16 or
disabled child in his or her care, or (2) is at least 62 years old;
applies able to divorced spouse if the mariage lasted at least 10
years;
• Dependent child of disabled worker.
• Disability benefits may be stopped is the disabled worker
refuses to participate in rehabilitation.
• Disability benefits may be reduced if disabled beenefits
are received from workers’ compensation or under
federal, state, or local law.

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2. 2. Types of Social Insurance Benefits

Amount of Benefits:
• Primary insurance amount (PIA): is computed from a person’s
average indexed monthly earnings (AIME), which based on
worker’s earnings for prior years, up to the maximum Social
Security wage base.
• Other factors affecting benefits amount: number of
beneficiaries, wage of worker.
• Cost of living adjustment (COLA).
• The earning test: the retirement benefit may be reduced for a
retiree who is younger than normal retirement age and whose
annual earned income exceeds the retirement earnings exempt
amount.

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2. 2. Types of Social Insurance Benefits

Amount of Benefits (Etti Baranoff (2004), p.379)

Annual Retirement Earnings Test Exempt Amounts for Persons

under the Normal Retirement Age
Year Lower amount Higher amount
2000 $10,080 $ 17,000
2001 10,680 25,000
2002 11,280 30,000
2003 11,520 30,720

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2. 2. Types of Social Insurance Benefits

Financing of Beneefits (Table 15.12, Etti Baranoff (2004), p.379)

• Taxation: Social Tax rates paid on OASI DI OASDI Medicare

Security benefits wages and earnings A
since 1990
are financed
through payroll Tax rate for 5.30 0.90 6.20 1.45
taxes paid by employees and
employers and employers,each
employees and (%)
by a special tax Tax rate for self- 10.60 1.80 12.40 2.90
on earnings paid employed persons
by the self- (%)
employed.

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2. 2. Types of Social Insurance Benefits

Financing of Beneefits (Table 15.12, Etti Baranoff (2004),
p.379)
• Trust Funds: The funds collected from payroll taxes are
allocated among three trust funds:
• One is for retirement and survivors’ benefits;
• One is for disability insurance;
• One is for hospital insurance, or Medicare Part A.
• The fourth trust fund: the supplementary medical
insurance trust fund, which is financed by monthly
premiums from persons enrolled in the Medicare Part B,
supplementary medical benefits.

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2. 2. Types of Social Insurance Benefits

Others social benefits
- Medicare, Medicaid
- Unemployment insurance
-…

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2. 2. Types of Social Insurance Benefits

Administration:
• The Social Securiry program is administered by the Social Security
Administration, an agency of the US Department of Health and
Human Services.

• Qualification for hospital and medical benefits is determined by the

district office, but claims for such benefits are processed through
private insurer intermediaries under the contract with the Social
Security Administration.

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2. 2. Types of Social Insurance Benefits

Social Security Issues
• Privatization?
• Moving a way from the pay-as-you-go system: the current
workers finance the benefits of the current recipients.
• Cost of drugs
• Social Security taxes has increased much faster than the
general level of prices and even faster than the cost of
health care during the past two decades.

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2.3. Social Security Premium/Taxes

2.3.1. Different between Premium and Taxes
2.3.2. How to determine Premium/taxes
• There are considerable variations among countries in the financing of
social insurance programs. Australia, Sweden, and Denmark are
among those in which the state bears a high proportion of the costs.
The distribution of costs also varies within each country according to
the particular program in question. For instance, it is common for
employers to bear the full cost of workmen’s injury insurance. See
also social welfare program.

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US’s social insurance vs. VN’s Social Insurance

US’s Social Insurance VN’s Social Insurance

• Benefits: Old age, Survivors, • Benefits: Old age, Survivors,

Disability, Medicare Disability and Injury, Illness,
medicare, Pregnant and
• Time of protection: after retired,
feeding
disability • time of protection: during
working time and after retired
• Contribution: social insurance
• Contribution: social security
taxes premium
• Organization: Social Insurance
• Organization: Government
Organization

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Protections for labor in US

Social Insurance

social Retired
insurance time

Private
Government insurance: group private
Plans and individual
products insurance,
workers’s
Working
time
…
Government
Workers ‘ and
unemployment plans
cpmpensation

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Protections for labor in VN

Retired
time
Private
Social Insurance insurance: group
and individual social
products insurance
Working
time
private
insurance

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