Optimal Social Insurance Research Articles

A Social Insurance Perspective on Pandemic Fiscal Policy: Implications for Unemployment Insurance and Hazard Pay

This paper considers fiscal policy during the pandemic through the lens of optimal social insurance. We develop a simple framework to analyze how government taxes and transfers could mimic the insurance that people would like to have had against pandemic income losses. Permutations of the framework provide insight into how unemployment insurance should be structured, when and how much hazard pay is called for, and whether fiscal policy should aim just to redistribute income or also to stimulate aggregate demand during a pandemic. When we use the insights from the model to evaluate unemployment insurance measures taken during the pandemic, we find that some, but far from all, of the implications of the social insurance framework were followed. In the case of hazard pay, we find that the proposal for a national program (the never-implemented HEROES Act) was both broader and more generous than a social insurance perspective would call for. We suggest that the social insurance perspective on fiscal policy is likely to become increasingly relevant as pandemics and climate-related natural disasters become more common causes of unemployment and recessions.

Optimal time‐consistent social health insurance and private health insurance strategy under a new health insurance framework

AbstractA new continuous‐time health insurance framework is proposed to simultaneously determine the optimal social health insurance strategy and optimal private health insurance strategy. The social health insurance can cover both the expenditures of general illnesses and critical illnesses, while the private health insurance only covers the expenditure of critical illnesses. To reflect the inevitable connection between critical illnesses and general illnesses, we assume that the number of critical illnesses and the number of general illnesses are positively correlated. The policyholder's objective is to find an optimal time‐consistent social health insurance and private health insurance strategy so as to maximize the expected terminal wealth while minimizing the variance of the terminal wealth. Explicit solutions for the optimal time‐consistent health insurance strategy and the corresponding value function are obtained by employing the stochastic control technique. Finally, we numerically examine the influence of expenditure parameters on the optimal time‐consistent health insurance strategy, and also examine the effect of the health insurance on the policyholder. The results reveal the similarities and differences between social health insurance and private health insurance, which provide insightful guidance for health insurance practice in reality.

The place of social insurance in the formation of resources of the social protection system

Introduction. Today there is a need for the application of effective and efficient methods and means of state regulation of the social sphere; which raises to a new level the social protection system in general and the social insurance system in particular. The development of an optimal social insurance system is one of the priorities of the state’s social strategy and should be considered as a subsystem of social protection aimed at overcoming poverty; ensuring the appropriate level and quality of life of the population of Ukraine.Purpose. The main task of the article is to identify the place of financial resources of social insurance in the system of social protection in Ukraine by analyzing current statistical information.Methods. The study is based on operational and system-structural analysis of current statistical information on the accumulation and distribution of budget funds in the social sphere. Quantitative and qualitative comparison; graphical and statistical methods are used to analyze and evaluate the effectiveness of the social insurance system.Results. A significant part of the expenditures of social protection of the population in Ukraine is covered by the funds of the obligatory state social insurance; which testifies to its key role in ensuring the social protection of the population of Ukraine. At the same time; the formation of social infrastructure resources is carried out mainly through budget funding; so the constant growth of social expenditures in the consolidated budget of Ukraine does not allow to ensure a high standard of living. Social insurance is characterized by partial self-financing; as it provides for the formation of funds through social contributions; which finance a third of social benefits and other social transfers. Thus; it is an effective tool for ensuring state regulation of the social sphere.Discussion. In the further research it is expedient to focus on studying world practice of formation of effective systems of social insurance for the purpose of search of alternative types of social insurance and their introduction in Ukraine.

Optimal Social Insurance and Health Inequality

Abstract This paper integrates into public economics a biologically founded, stochastic process of individual aging. The novel approach enables us to quantitatively characterize the optimal joint design of health and retirement policy behind the veil of ignorance for today and in response to future medical progress. Calibrating our model to Germany, our analysis suggests that the current social insurance policy instruments are set close to the (constrained) socially optimal levels, given proportional contribution rates for health and pension finance, the equivalence principle in the pension system, and a common statutory retirement age. Future progress in medical technology calls for a potentially drastic increase in health spending and a higher retirement age without lowering the pension contribution rate. Interestingly, from an ex ante point of view, medical progress and higher health spending are in conflict with the goal to reduce health inequality.

Optimal Social Insurance with Endogenous Health*

AbstractIn this paper, I analyze optimal insurance against unemployment and disability in a private information economy with endogenous health and search effort. Individuals can reduce the probability of becoming disabled by exerting prevention effort. I show that the optimal sequence of consumption is increasing for a working individual and constant for a disabled individual. During unemployment, decreasing benefits are not necessarily optimal. The prevention constraint implies increasing benefits while the search constraint demands decreasing benefits while being unemployed. However, if individuals respond sufficiently to search incentives, the latter effect dominates the former and the optimal consumption sequence is decreasing during unemployment.

Fair Long-Term Care Insurance

The study of optimal long-term care (LTC) social insurance is generally carried out under the utilitarian social criterion, which penalizes individuals who have a lower capacity to convert resources into well-being, such as dependent elderly individuals or prematurely dead individuals. This paper revisits the design of optimal LTC insurance while adopting the ex post egalitarian social criterion, which gives priority to the worst-off in realized terms (i.e. once the state of nature has been revealed). Using a lifecycle model with risk about the duration of life and risk about old-age dependence, it is shown that the optimal LTC social insurance is quite sensitive to the postulated social criterion. The optimal second-best social insurance under the ex post egalitarian criterion involves, in comparison to utilitarianism, higher LTC benefits, lower pension benefits, a higher tax rate on savings, as well as a lower tax rate on labor earnings.

Optimal Social Insurance and Rising Labor Market Risk

This paper analyzes the optimal response of the social insurance system to a rise in labor market risk. To this end, we develop a tractable macroeconomic model with risk-free physical capital, risky human capital (labor market risk) and unobservable effort choice affecting the distribution of human capital shocks (moral hazard). We show that constrained optimal allocations are simple in the sense that they can be found by solving a static social planner problem. We further show that constrained optimal allocations are the equilibrium allocations of a market economy in which the government uses taxes and transfers that are linear in household wealth/income. We use the tractability result to show that an increase in labor market (human capital) risk increases social welfare if the government adjusts the tax-and-transfer system optimally. Finally, we provide a quantitative analysis of the secular rise in job displacement risk in the US and find that the welfare cost of not adjusting the social insurance system optimally can be substantial.

A kink that makes you sick: The effect of sick pay on absence

SummaryWe exploit a regression kink design to estimate the elasticity of the duration of sickness absence with respect to replacement rate. Elasticity is a central parameter in defining the optimal social insurance scheme compensating for lost earnings due to sickness. We use comprehensive administrative data and a kink in the policy rule near the median earnings. We find a statistically significant estimate of the elasticity of the order of one.

Optimal Social Insurance and Health Inequality

This paper integrates into public economics a biologically founded, stochastic process of individual ageing. The novel approach enables us to investigate the interaction between health and retirement policy in order to quantitatively characterize the optimal joint design of the social insurance system today and in response to future medical progress, and its implications for health inequality. Calibrating our model to Germany, we find that currently the public health and pension system is approximately optimal. Future progress in medical technology calls for a potentially drastic increase in health spending that typically shall be accompanied with a lower pension savings rate and a higher retirement age. Medical progress and higher health spending is predicted to lead to more health inequality.

Optimal Social Insurance and Health Inequality

This paper integrates into public economics a biologically founded, stochastic process of individual ageing. The novel approach enables us to investigate the interaction between health and retirement policy in order to quantitatively characterize the optimal joint design of the social insurance system today and in response to future medical progress, and its implications for health inequality. Calibrating our model to Germany, we find that currently the public health and pension system is approximately optimal. Future progress in medical technology calls for a potentially drastic increase in health spending that typically shall be accompanied with a lower pension savings rate and a higher retirement age. Medical progress and higher health spending is predicted to lead to more health inequality.

Welfare stigma and risk taking in the welfare state

The welfare state provides social insurance for lifetime risks. In that framework welfare stigma in form of a social norm against living off (net-)transfers is introduced, and the impact of welfare stigma on self-insurance and social insurance that works through redistributive taxation is analyzed. It turns out that introducing welfare stigma reduces the socially optimal self-insurance and raises the socially optimal social insurance. It may be efficient for the society to operate at a point on its opportunity frontier where an increase in risk taking decreases mean post-tax income and welfare stigma. In the presence of moral hazard self-insurance efforts are invariant with respect to welfare stigma whereas social insurance increases upon introducing welfare stigma. Furthermore, it is shown that self-insurance and social insurance are inefficiently low or high depending on the preference intensity of the social norm. Open image in new window Fig. 1 Efficient risk taking in dependence of the social norm

Optimal Social Insurance for Heterogeneous Agents With Private Insurance

This article analytically characterizes optimal social insurance in an economy with both ex ante heterogeneity and ex post risk, decomposing the benefits of social insurance into a redistributive and insurance benefit. Agents exert effort to increase the likelihood of high outcome events and are additionally supplied actuarially fair private insurance for this earnings risk. This article is novel in its joint consideration of two sources of heterogeneity, two potential sources of insurance, and an endogenous ex post distribution of outcomes. The introduction of optimal private insurance eliminates the insurance benefit of social insurance, but leaves the redistributive benefit intact. An income effect induced by the crowding out of private insurance generates an additional benefit to social insurance when it takes the form of a linear income tax. Finally, numerical simulations illustrate how the relative contributions of ex ante and ex post risk differentially impact the welfare loss associated with setting optimal social insurance without recognizing the presence of private insurance.

Catalysts for social insurance: education subsidies versus physical capital taxation

To analyze the optimal social insurance package, we set up a two-period life-cycle model with risky human capital investment in which the government has access to labor taxation, education subsidies, and capital taxation. Social insurance is provided by redistributive labor taxation. We point out that both education subsidies and capital taxation are used as catalysts to facilitate social insurance by mitigating distortions from labor taxation. Moreover, we derive a Ramsey rule for the optimal combination of these two instruments. Relative to capital taxation, optimal education subsidies increase with their relative effectiveness to boost labor supply and with households’ underinvestment in education, but they decrease with their relative net distortions. For the optimal absolute levels, indirect complementarity effects (i.e., influencing the effectiveness of the other instrument) do matter. Numerical simulations confirm that the catalysts are strategic substitutes and indicate that capital taxation is more important.

On the desirability of taxing capital income in optimal social insurance

This paper analyzes optimal linear taxes on labor income and savings in a two-period life-cycle model with ex ante identical households, endogenous leisure demands in both periods, and general processes of skill shocks over the life cycle. We demonstrate that the Atkinson–Stiglitz theorem breaks down under risk. Capital taxes are employed besides labor income taxes for two distinct reasons: i) capital taxes reduce labor supply distortions on second-period labor supply, since second-period labor supply and saving are substitutes, ii) capital taxes insure first-period income risk, although this benefit is partially off-set because first-period labor supply and saving are complements. Our results imply that (retirement) saving should not be actuarially fair.

Workers' compensation and consumption smoothing

This paper investigates the consumption-smoothing benefits of state workers' compensation (WC) programs. These programs are among the largest and most controversial forms of social insurance, with the putative purpose of supporting families affected by unexpected income shocks due to workplace injuries and illnesses. Using Health and Retirement Study (HRS) data for a sample of workers who have experienced a work-related, work-limiting disability, I find that a 10% increase in WC benefit generosity offsets the drop in household consumption upon injury by 3 to 5%. Moreover, my estimates imply that if benefits were very low, the drop in consumption upon injury would be in the range of 30%. A model adapted from the literature on optimal social insurance yields a formula for the optimal level of WC benefits, which depends on empirical estimates of the consumption-smoothing parameter. My calculations suggest that current WC benefit levels are somewhat higher than optimal.

Optimal Monetary Policy and Social Insurance in a Small Open Economy

This paper studies the issue of optimal monetary policy and social insurance in a small open economy model with sticky prices and segmented asset markets. We evaluate whether optimal monetary policy should stabilize inflation to correct distortions associated with price stickiness or if it should provide social insurance (i.e., stabilize consumption) to correct distortions related to segmented asset markets. For an empirically plausible parametrization of these frictions, the optimal monetary policy should focus on stabilizing the inflation rate. This result suggests that providing social insurance with monetary instruments could be highly distortionary in an economy with nominal rigidities.

How to Share Our Risks Efficiently? Principles for Optimal Social Insurance and Pension Provision

The efficient organisation of social insurance is an important problem for modern societies. The paper discusses evidence that shocks in labour income have largely persistent effects and analyses the implications of this observation for the optimal design of institutions for wage contracting, social security, and pensions. In an optimal contract, wages reflect variations in individual productivity for incentives reasons. However, the optimal contract insures workers against firm specific shocks. These can better be born by shareholders who can diversify risks on capital markets. Progressive income taxation provides further insurance. On top of that there is scope for additional insurance based on ‘verifiable’ information on unemployment and health conditions. As final form of ‘insurance’, the paper analyzes the role of self-insurance. Income shocks can be absorbed partially by precautionary saving. The individual’s saving plans for retirement and for precaution are, therefore, related issues. In an institutional setting with mandatory saving for retirement, an integration of disability and unemployment insurance on the one hand and the pension system on the other hand in a lifetime savings account allows for this interrelation. The paper analyzes how to deal with the uncertainty in the return on savings in the framework of a lifetime saving account.

Catalysts for Social Insurance: Education Subsidies vs. Real Capital Taxation

To analyze the optimal social insurance package, we set up a two-period life-cycle model with risky human capital investment in which the government has access to labor taxation, education subsidies and capital taxation. Social insurance is provided by redistributive labor taxation. Moreover, both education subsidies and capital taxation are used as catalysts to facilitate social insurance by mitigating distortions from labor taxation. We derive a Ramsey-rule for the optimal combination of these two instruments. Relative to capital taxation, optimal education subsidies increase with their relative effectiveness to boost labor supply and with households’ underinvestment into education, but they decrease with their relative net distortions. For the optimal absolute levels, indirect complementarity effects (i.e., influencing the effectiveness of the other instrument) do matter. Generally, a decrease in capital taxes should be accompanied by an increase in education subsidies.

On health insurance and household decisions: A treatment effect analysis

In developing countries, where health insurance is not a commonly purchased financial instrument, recent debates have revolved around extending health insurance coverage to a wider range of the population, primarily via compulsory insurance schemes. However, these debates rarely consider the competing demands placed on the family budget, which will influence the acceptability of the program by the populace. In this paper, we draw on data from the 2000 income and expenditure survey to examine treatment effects associated with household insurance status, providing a detailed examination of expenditure substitution patterns within South Africa. In agreement with economic theory, the expansion of health insurance coverage via compulsory schemes creates additional burdens for households, which households accommodate via expenditure substitution. The observed variation in the household's ability to accommodate increased expenditure can and should be used in future to assess policy options and in the design of an optimal social health insurance program.

Optimal Social Insurance with Linear Income Taxation*

AbstractWe study optimal social insurance aimed at insuring disability risk in the presence of linear income taxation. Optimal disability insurance benefits rise with previous earnings. Optimal insurance is incomplete even though disability risks are exogenous and verifiable so that moral hazard in disability insurance is absent. Imperfect insurance is optimal because it encourages workers to insure themselves against disability by working and saving more, thereby alleviating the distortionary impact of the redistributive income tax on labor supply and savings.