Public Finance, Foldvary

Anderson 2^nd ed Chapter 9 Social Insurance

P. 155 chapter 5 The Samaritan’s Dilemma

Governmental cash transfers induce the poor to not buy insurance.

The optimal transfer is in-kind insurance.

P. 257 Social Insurance framework

Social Security and Medicare: insurance against low income after retirement.

Medicaid: medical insurance for the poor.

Germany became the first nation in the world to adopt an old-age social insurance program in 1889, designed by Germany's Chancellor, Otto von Bismarck.

The idea was first put forward, at Bismarck's behest, in 1881 by Germany's Emperor, William the First. Bismarck was motivated to introduce social insurance in Germany to stave-off socialism.

Germany initially set age 70 as the retirement age.

The United Kingdom enacted national medical insurance in 1911, expanded in 1948.

Why governmental insurance?

1. Equity. The poor cannot afford insurance.

2. Efficiency. The private insurance market is accused of failing to provide efficient policies.

Why efficiency failure?

Insurance market is based on risk probabilities.

Asymmetric information. Insurance company cannot calculate probabilities.

Markets require perfect information?

Moral hazard: the insured person increases the probability of the insured event by more than warranted by actual misfortune.

Adverse selection: those who are more costly get more insurance.

Insurer lacks knowledge of characteristics of the insured.

Cannot calculate accurate probabilities.

Does private car, house, pet insurance fail?

For commoditised, general insurance products, the results suggest that these markets

work reasonably well in the interests of consumers.

http://www.fsa.gov.uk/pubs/other/ICOB_review.pdf

Financial Services Authority

ICOB Review Interim Report: Consumer Experiences and Outcomes in General Insurance

Markets March 2007

UK Insurance Conduct of Business (ICOB) sourcebook.

Similar to motor insurance, the market for pet insurance, while considered more

complex by consumers, works fairly well in their interests.

SS is an annuity.

P. 261: lack of a market for real annuities?

Rationales for SS: paternalism, redistribution

Pension systems:

Defined contribution, Defined benefit; Paygo

US SS: based on average earnings.

Normal retirement age now 66 if born 1943 to 1954.

Average benefit for a single worker $1100 per month.

SS taxes.

Legally just an income tax.

Employer and employee did pay 6.2% each, total 12.4$.

Self-employment tax.

2011 employee lowered to 4.2%

Tax based on wages up to $106,800

SS benefits are welfare.

SS is taxable, for income > $34K, 85% of SS income is taxed.

Medicare tax 1.45% of wages each payer, with no limit. Total 2.9%.

40% of federal outlays for social insurance.

Medicare started 1965.

For almost all 65 years old get part A.

If you (or your spouse) did not pay Medicare taxes while you worked, and you are age 65 or older and a citizen or permanent resident of the United States, you may buy Part A.

Part B is voluntary.

Part C combines A and B.

Part D covered prescription drugs.

Medicaid started 1965.

Federal-state program.

Increasingly a burden on states as costs rise.

Supplemental Soc Sec Income SSI.

Means-tested cash transfer for the low-income disabled.

Long term, social insurance will rise, and is unsustainable with current policy.

Governmental disaster insurance.

FEMA - Federal Emergency Management Agency

US National Flood Insurance Program.

An insurance subsidy that generated moral hazard.

There are repetitive losses.

Federal Aviation Administration terrorist attack insurance to airlines.

Most insurance is regulated by the states.

Except credit default swap derivatives.

A credit default swap (CDS) is similar to a traditional insurance policy, in as much as it obliges the seller of the CDS to compensate the buyer in the event of loan default.

Generally, this involves an exchange or "swap" of the defaulted loan instrument (and with it the right to recover the default loan at some later time) for immediate money - usually the face value of the loan.

However, there is a significant difference between a traditional insurance policy and a CDS. Anyone can purchase a CDS, even buyers who do not hold the loan instrument and may have no direct "insurable interest" in the loan.

The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, receives a payoff if the loan defaults

California Earthquake Authority sells insurance to residents,

High deductibles.

Market failure with unknown probabilities?

Could be provided by Lloyd’s of London?

There are now several companies offering more comprehensive coverage, oftentimes at a lower cost than the State "C.E.A. Program".

http://www.sr22.net/quakeqa.html

The most competitive prices can be found through Geovera (owned by St. Paul Ins. Company), ACE American, Pacific Select, and Pacific Specialty.

In difficult to place situations the market is operated through Lloyds of London, and others.

Brick homes, older homes (built prior to 1900), certain masonry construction types cannot be covered on most programs. Additionally, home built on stilts, or steep grades are limited in some programs. They can write quake coverage as a stand-alone policy.

P. 278: effectiveness of Medicare.

The incremental value of Medicare spending with regard to survival is essentially zero.

Extra spending does not change the survival rate.