Income Security Policy and Policy Making

Income Security Policy is usually applied through various programs designed to provide a population with income at times when they are unable to care for themselves. Income maintenance is based in a combination of five main types of program

1. Social insurance.
2. Means-tested benefits. This is financial assistance provided for those who are unable to cover basic needs (such as food, clothing, and housing) due to poverty or lack of income because of unemployment, sickness, disability, or caring for children. While assistance is often in the form of financial payments, those eligible for social welfare can usually access health and educational services free of charge. The amount of support is enough to cover basic needs and eligibility is often subject to a comprehensive and complex assessment of an applicant's social and financial situation.
3. Non-contributory benefits. Several countries have special schemes, administered with no requirement for contributions and no means test, for people in certain categories of need (for example, veterans of armed forces, people with disabilities, and very old people).
4. Discretionary benefits. Some schemes are based on the discretion of an official, such as a social worker.
5. Universal or categorical benefits, also known as demogrants. These are non-contributory benefits given to whole sections of the population without a test of means or need, such as family allowances or the public pension in New Zealand (known as New Zealand Superannuation).

That a compulsory government program, not the private market, provides unemployment insurance can be explained using the concepts of adverse selection and moral hazard.

Adverse selection refers to the fact that "workers who have the highest probability of becoming unemployed have the highest demand for unemployment insurance." Adverse selection causes profit maximizing private insurance agencies to set high premiums for the insurance because there is a high likelihood they will have to make payments to the policyholder. High premiums exclude many individuals who otherwise might purchase the insurance. "A compulsory government program avoids the adverse selection problem. Hence, government provision of UI has the potential to increase efficiency. However, government provision does not eliminate moral hazard."

"At the same time, those workers who managed to obtain insurance might experience more unemployment other than what would have been the case." The private insurance company would have to determine whether the employee is unemployed through no fault of their own, which is difficult to determine. Incorrect determinations could result in the payout of significant amounts for fraudulent claims, or alternately failure to pay legitimate claims. This leads to the rationale that if the government could solve either problem, then government intervention would increase efficiency.