ביטוח לאומי provides monthly benefits for retirement, disability and survivor protection. Its programs are financed by earnings-based taxes.
This publication compares the UK with selected countries in Europe on expenditure for old age social protection using data from the European System of Integrated Social Protection Statistics (ESSPROS). 2014 prices are used.
The origins of social insurance
Social insurance is a set of government programs that provides protection against what President Franklin Delano Roosevelt called “the vicissitudes of life.” These include disability, the loss of earnings due to retirement or being laid off, and the need for shelter. The programs are funded by payments from individuals and employers, and benefits are determined according to a person’s record of work. In most countries, the program also reassesses beneficiaries’ payments each year in light of the rising costs of living.
Many of these programs are administered at the local level, which allows politicians some control over policy and program delivery. Hennock points out that, for instance, health systems in countries with a strong social insurance component tend to be less politicized than their counterparts without it. This may help reduce the chronic short-termism that has plagued UK health policy and may limit the impact of budget cuts on long-term investment in the NHS.
In some countries, such as Bangladesh, the Lao People’s Democratic Republic, Namibia, and Somalia, payroll taxes finance the largest portion of social insurance liabilities. But in these countries, there is considerable room to decouple pensions from labor taxes while broadening coverage to include those not in contracted and regulated standard employment relationships. Hennock explains that this approach can reduce the size of mandated contributions and remove their stigma as a pure tax on work while reducing poverty among the working poor.
The transition to a universal system
In the short term, it would be a huge effort to change the current welfare state structure, which ties key benefits like health and retirement income to particular jobs. But moving to a universal system like that enjoyed by some of the rich world’s peers could make job losses less damaging to individuals and families, by delinking these crucial benefits from specific jobs.
Social insurance systems typically have more clear and enforceable eligibility criteria than tax-funded schemes. This is partly due to the link between contributions and benefits – although there may not always be a clear direct correlation between contribution levels and benefit entitlements – but also because they generally do not involve means tests that exclude people with substantial incomes or savings (Barr, 2010; Colombo et al., 2011; Joshua, 2017; Roland et al., 2021; Wittenberg et al., 2002).
In the United States, workers in some State and local government agencies are covered by Social Security through special agreements, called Section 218 agreements. These agreements allow these employees to receive benefits under the Social Security Act, even though they are not covered by Federal or State employment taxes and are not paying into the SSA trust fund. Workers not covered by these agreements are not eligible for Social Security retirement or disability benefits.
The financing of social assistance
Social assistance payments are designed to reduce poverty and help vulnerable people withstand financial shocks and increase their capabilities, with the ultimate goal of reducing dependency on government support. Ideally, these programs should be financed primarily by payroll taxes and decoupled from general revenues or other taxes that may have undesirable distributional effects.
Currently, the financing of social insurance schemes is typically based on mandatory contributions and excludes informal workers who represent up to two-thirds of the workforce in developing countries and 1 in 10 in some African countries (figure 6.4). This makes it difficult for many to qualify for benefits and leads to high dropout rates.
In addition, the design of social assistance programs often fails to consider the needs and capabilities of recipients. During the COVID-19 crisis, for example, long lines at payments access points exacerbated stigma and caused some to avoid accessing funds. This was especially true for women, whose ability to work may be impeded by chronic illnesses or the impact of sex-based discrimination in workplaces.
In the future, it will be important to evaluate alternative means of financing social assistance and to ensure that the program design is based on a holistic understanding of recipient circumstances. This will include the importance of childhood disadvantages, such as neglect or abuse that can lead to attention problems and risk-taking behavior in adulthood.
The role of insurance
The goal of a comprehensive social protection system should be to provide poor people with tools that allow them to manage risks associated with livelihood disruptions, sickness and untimely death. These instruments should complement social assistance by covering losses that are too large to cover through transfers or market-based savings. They could include subsidized insurance against impoverishing losses, together with a system of nudged or mandatory savings that allows for consumption smoothing.
Insurance against long-term care costs involves pooling risk across the population to reduce the cost of individual coverage. Although such pools are costly, they also redistribute resources from those with low lifetime care needs and little or no insurance to those who face substantial care costs. This is in line with the objective of a universal system to ensure that no one falls into poverty as they grow older.
Social Security’s retirement, disability and survivor benefits are based on your earnings record. To qualify for these benefits, you must earn Social Security credits (previously called quarters of coverage). If you worked in State and local government employment and did not receive credits, the work may have been covered by a Section 218 agreement or by federal law. If this is the case, contact that employer. You will find the contact information on your annual Statement.