Social security

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Western University
Actuarial Science
Actuarial Science 2427A/B
Kopp/ Davies

Social Security To help combat economic insecurity, governments in all developed countries have created social security programs Social security programs were developed in countries in response to a perceived need by society for certain types of measures/programs for which neither individuals nor private insurers can (or will) provide adequate coverage Characteristics of Social Security Programs 1. They are established by government statue 2. They provide individuals with cash payments (and other services) that replace at least part of the income loss from: • old age • disability • death • sickness • unemployment • maternity • occupational injuries 5 Major Approaches Used to Provide Cash Payments and Services Under Social Security Programs 1. Social Insurance Characteristics • part of a social security program • usually financed by contributions from employers and employees • these contributions are kept in a separate account and administered by the government • benefits are paid from these funds • rights of individuals to receive benefits is usually tied to the person’s past contributions to the fund • size of the benefit usually varies according person’s prior earnings • participation and coverage is compulsory by law • qualification for benefits/determining the size of benefits are prescribed by law • there is a long-term plan in place for financing the current/future benefits • plan is not established by the gov’t solely for its employees 2. Social Assistance • provides cash payments and other benefits to individuals in need • common features are: ⇒ benefits confined to low-income or poor recipients ⇒ benefits are paid based on a “needs” assessment ⇒ benefits usually financed by general revenue of the gov’t • usually no long term financial plan has been put in place 3. Universal or Demogrant Programs • provides a flat cash benefit or tax break to individuals without regard to recipients income, employment or wealth • financed by gov’t general revenues 4. Public Provident Funds • these are compulsory savings programs • contributions are withheld from earnings of employees and matched by employers • each employee has an account that earns interest • accumulated amount paid out upon retirement in monthly payments • mainly used in developing countries 5. Income Tested Programs These are similar to social insurance programs, but are: • financed out of general tax revenue • cash benefits must be applied for and are income tested • benefits are loosely based on past income The Attack on Economic Insecurity There are 3 components to successfully protect oneself from the potential impact of economic insecurity 1. Individual plans 2. Employer benefit plans 3. Social Security Programs (Gov’t) Individual • life insurance • health insurance • annuities • disability insurance • RRSP’s • property/casualty insurance Employer Benefits These are benefits that may be available through the company you work for • group insurance • drug plan • supplemental hospital plan • short-term/long-term disability plans • dental and vision care plans • pension plan • group RRSP’s Public Programs and Gov’t Intervention Social security programs such as: • CPP/QPP, OAS, GIS • provincial medical plans • employment insurance • worker’s compensation Plus other things like: • public assistance • maternity/parental leave • labour laws/minimum wage • rent controls Principles of Economic Security Programs Introduction There is general disagreement about what constitutes a social security program and what their purpose should be However, the following 4 principles represent areas where there is general agreement about what social security programs should be: 1. Subsidiarity How much of one’s economic security is the responsibility of the gov’t and how much is the individual’s responsibility? The principle states: A higher government unit should not perform the tasks that can be effectively performed by a lower unit 2. Sovereignty of Demand A democratic gov’t does essentially what the citizens want it to do • if certain programs are desired by the majority of citizens, the gov’t will enact laws or legislation to make them happen 3. Loss Prevention and Rehabilitation Activities that minimize losses or reduce loss severity are highly desirable Why? Because society benefits as the economic burden on society is reduced Activities include: • rehabilitation of disabled workers • retraining of unemployed people • AIDS awareness programs 4. Diversity No single approach should be used to solve the problem of economic insecurity • want programs that supplement and complement each other • BUT do not want too many programs, as they could overlap which is inefficient and costly Closer Look at Social Insurance Basic Characteristics of Social Insurance 1. Compulsory Program • covers healthy and unhealthy people • this allows a basic floor of income protection to be provided at a reasonable cost to the masses 2. Provides minimum floor of protection • in most countries, philosophy is that individual is responsible for his/her own economic security • if gov’t assistance is needed,
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