Toward an Inclusive Conception of Social Insurance, Part I

Social insurance “consists in protecting wage-earning families which have developed standards of living from losing them, and in helping wage-earning families without standards to gain them.”

--Social Insurance: A Program of Social Reform (1910), Henry Roger Seager

I've been digging Matt's series of posts on the safety net and John's last one on whether a frame like "expand the middle class" is really all that different from one along the lines of "reduce poverty." I'm hoping to do some longer posts over the next few weeks on these matters. As a starting point, I think it's important for us to put to rest the distinction between welfare and social insurance. Conventional wisdom has it that programs like Social Security, Medicare and Unemployment Insurance are categorically different than programs like TANF, food stamps, and Medicaid. A common way of expressing this difference is that the first set of programs are “social insurance” and the second set are “means-tested public assistance” or, more pejoratively, “welfare.”

This distinction is both artificial and ill-conceived. Means-tested programs like TANF and food stamps should be thought of as a necessary part of America’s system of social insurance rather than as “welfare” programs that exist outside of, and have little in common with, that system. Like Social Security and other social insurance programs, means-tested public assistance programs protect Americans against various risks that can reduce their economic security. This essential similarity of purpose is more important that some of the design differences that exist among programs serving an income-security purpose.

In True Security: Rethinking American Social Insurance, Michael Graetz and Jerry Mashaw define social insurance as a set of programs and institutions that “cover common risks to income security across the life cycle of individuals” (45). In this conception, social insurance is defined by its core purpose—moderating the risks of income loss or inadequacy—and not by its funding mechanism or other design features. The Graetz/Mashaw project is best understood, not as a sweeping reconceptualization of social insurance, but as an attempt to develop a conception of social insurance that is more conceptually coherent and useful, and perhaps even more historically grounded, than the current conventional conception of social insurance in the United States.

In their view, the argument that social insurance programs cannot be means-tested is an “ahistorical” one that reflects a political strategy to distinguish Social Security and other programs from unpopular “welfare” programs like AFDC.

As a matter of history, protection against current low income because of defined personal or family circumstances, irrespective of past contributions or earnings, has long been a cornerstone of American social insurance arrangements. The original Social Security Act was a compromise between those who thought social insurance should be structured primarily as a protection against low income and those who saw it primarily as a protection against loss of prior economic status and wanted social insurance closely tied to workforce attachment. (62)

While the strategy of distinguishing social insurance from “welfare” may have been politically beneficial at times, Graetz and Mashaw view it as a “serious mistake.”

This artificial and ahistorical division of the social welfare world between contributory and non-contributory schemes strands crucial poverty reduction programs in political backwaters. It creates confusion in both public discourse and public perception whenever progressive benefit and contribution formulas for social insurance are proposed and discussed. This political separation poses political dangers for ‘contributory’ schemes as well. It highlights ‘individual equity’ or bank-account considerations in social insurance arrangements—represented recently by the ubiquitous calculations of each individual’s ‘money’s worth’ from Social Security—while submerging the social adequacy commitment that should be the fundamental norm in the design and defense of social insurance.

This doesn’t mean that public assistance programs are solely social insurance, or even that all public assistance programs are social insurance. While Graetz and Mashaw believe social insurance is not limited to Social Security and Medicare, their conception of social insurance as a protection against income insecurity is “considerably narrower than all the public activities that might be said to support American family income.” As an example, they note that education programs are not social insurance, since they don’t provide insurance against “a current loss of economic well-being.” Instead, such programs are more appropriately viewed as an investment in future economic opportunity. (58)

This distinction isn’t completely clear-cut. Education obtained in one’s youth, after all, does enhance income security over the life cycle. But Graetz and Mashaw argue that such a narrowing of the definition is necessary for pragmatic reasons.

If the definition is too broad, ‘insurance’ becomes a useless metaphor.... Important ideas about good program design—identifiable risks, moral hazard, adverse selection, and so forth—lose their salience. If the criminal justice system qualifies as “social insurance” (protection against loss of income or assets through theft, embezzlement, and the like), the concept fails to define a distinctive area of public policy. (57)

Social insurance also is distinct from other types of insurance, including insurance provided in markets where there is considerable government involvement or regulation. The adjective “social” is important in making this distinction. Social insurance is different from other forms of insurance because it is a “social rather than an individual (or group) contract” and is made for “the purpose of collective provision, subsidy, or regulation.”

In part II, I'll discuss a specific case—why that quintessential "welfare" program, TANF, is best thought of in social-insurance terms.