Government and Social Insurance
What is Social Insurance?
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How Does the Government provide Social Insurance?
Federal and state governments run a number of insurance programs. Some of the programs look much like private insurance, in the sense that the members of a group make steady payments into a fund, and those in the group who suffer an adverse experience receive payments. Other programs protect against risk, but without an explicit fund set up. Following are some examples.
• Unemployment insurance: Employers in every state pay a small amount for unemployment insurance, which goes into a fund to pay benefits to workers who lose their jobs and do not find new jobs, for a period of time, usually up to six months.
• Pension insurance: Employers that offer pensions to their retired employees are required by law to pay a small fraction of what they are setting aside for pensions to the Pension Benefit Guarantee Corporation, which pays at least some pension benefits to workers if a company goes bankrupt and cannot pay the pensions it has promised.
• Deposit insurance: Banks are required by law to pay a small fraction of their deposits to the Federal Deposit Insurance Corporation, which goes into a fund that pays depositors the value of their bank deposits up to
$250,000 (the amount was raised from $100,000 to $250,000 in 2008) if the bank should go bankrupt.
• Workman’s compensation insurance: Employers are required by law to pay a small percentage of the salaries that they pay into funds, typically run at the state level, that pay benefits to workers who suffer an injury on the job.
• Retirement insurance: All workers pay a percentage of their income into Social Security and into Medicare, which then provides income and health care benefits to the elderly. Social Security and Medicare are not literally “insurance” in the sense that those currently contributing to the fund are not eligible for benefits. They function like insurance, however, in the sense that individuals make regular payments into the programs today in exchange for benefits they will receive in the case of a later event—either becoming old or becoming sick when old. A name for such programs is “social insurance.”
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