Social insurance has been defined as a program where risks are transferred to and pooled by an organization (often governmental) that is legally required to provide certain benefits. It is any government-sponsored program with the following four characteristics:
- The benefits, eligibility requirements, and other aspects of the program are defined by statute;
- Explicit provision is made to account for income and expenses (often through a trust fund);
- It is funded by taxes or premiums paid by (or on behalf of) participants (although additional sources of funding may be provided as well); and
- The program serves a defined population, and participation is either compulsory, or the program is subsidized heavily enough that most eligible individuals choose to participate.
Social insurance differs from welfare in that the beneficiary's contributions to the program are taken into account. A welfare program pays recipients based on need, not contributions. Medicare is an example of a social insurance program, while Medicaid is an example of a welfare one.
In the United States, Social Security, Medicare, and unemployment insurance are among the most well-known forms of social insurance.
Social Security
Social Security in the U.S. is primarily the Old-Age, Survivors, and Disability Insurance (OASDI) federal insurance program. Social Security is funded through payroll taxes called Federal Insurance Contributions Act tax (FICA) and/or Self Employed Contributions Act Tax (SECA). Tax deposits are collected by the Internal Revenue Service (IRS) and are formally entrusted to the Social Security Trust Funds. Social Security provides monetary benefits to retirees, their spouses and surviving dependent children, and disabled workers .
Social Security Poster
Social Security is one of the best-known social insurance programs in the United States. It provides benefits to retirees, surviving family members, and disabled workers who have contributed to the Social Security Trust Fund through payroll taxes.
Medicare
Medicare is a national program that guarantees access to health insurance for Americans aged 65 and older, younger people with disabilities, and people with certain chronic diseases. Medicare is funded through revenue from FICA and SECA payroll taxes, as well as through premiums paid by Medicare enrollees and general fund revenue from the federal government.
Unemployment Insurance
Unemployment insurance provides a monetary benefit to workers who have become unemployed through no fault of their own. Benefits are generally paid by state governments, and are funded in large part by state and federal payroll taxes levied against employers. These payroll taxes were established by the Federal Unemployment Tax Act (FUTA), and allow the IRS to collect federal employer taxes used to fund state workforce agencies. FUTA covers the costs of administering the Unemployment Insurance and Job Service programs in all states. In addition, FUTA pays one-half of the cost of extended unemployment benefits (during periods of high unemployment) and provides for a fund from which states may borrow, if necessary, to pay benefits.