EKN 310
Chapter 9 – Social Insurance and social
assistance
Introduction
Previously, Chapter 8 dealt with fiscal policy and its e8ect on poverty and
inequality.
Now, Chapter 9 deals with social security, which refers to systems designed to
protect individuals against income loss or instability.
• Social security aims to:
1) Provide income security
2) Enable consumption smoothing (stable living standards over time)
3) Reduce poverty and inequality
• Income losses can arise from contingencies such as unemployment,
retirement, illness / disability or death of a breadwinner
• Social security can be :
- Public (government-provided) OR private (market-based)
- Contributory (you pay into it) OR non-contributory (funded by taxes)
The 2 Components of Income Security Systems
1. Social Insurance
• Funded through mandatory contributions by workers/ employees.
• These contributions are called social security taxes (payroll taxes).
• Only contributors are eligible for these benefits.
• Main Idea: you pay during your working years ® receive benefits when
income is lost.
• Examples:
- Unemployment Insurance
- Pension Systems
, 2. Social Assistance
• Cash transfer programmes funded through general tax revenue (not
specific contributions)
• There is no requirement that you must contribute in order to qualify for this
benefit.
• This is targeted at vulnerable groups such as poor households, elderly
without savings or disabled individuals.
• Example:
- Old-age grant in SA
Key Di8erences
Social Insurance Social Assistance
Funded by payroll taxes Funded by general taxes
Contributory Non-contributory
Only contributors can benefit Anyone meeting certain criteria can
benefit
Linked to employment Targeted at vulnerable groups
* Developed countries ® rely on social insurance (high employment = more
contributors)
* Developing countries (SA) ® rely more on social assistance (higher
unemployment and informal sector)
Social Insurance
The Income Protection Role of Insurance
• Based on the principle of diminishing marginal utility:
The more you consume, each extra unit gives you less additional
satisfaction
• Therefore – people prefer stable consumption overtime rather than
fluctuating consumption (people derive more utility from a smooth path of
consumption than a variable one)
• Example: R300k + R300k (smooth) is preferred to R400k + R200k (uneven)
• This is the reason why individuals want to insure against income losses
cause by retirement, illness, jol loss etc.
Chapter 9 – Social Insurance and social
assistance
Introduction
Previously, Chapter 8 dealt with fiscal policy and its e8ect on poverty and
inequality.
Now, Chapter 9 deals with social security, which refers to systems designed to
protect individuals against income loss or instability.
• Social security aims to:
1) Provide income security
2) Enable consumption smoothing (stable living standards over time)
3) Reduce poverty and inequality
• Income losses can arise from contingencies such as unemployment,
retirement, illness / disability or death of a breadwinner
• Social security can be :
- Public (government-provided) OR private (market-based)
- Contributory (you pay into it) OR non-contributory (funded by taxes)
The 2 Components of Income Security Systems
1. Social Insurance
• Funded through mandatory contributions by workers/ employees.
• These contributions are called social security taxes (payroll taxes).
• Only contributors are eligible for these benefits.
• Main Idea: you pay during your working years ® receive benefits when
income is lost.
• Examples:
- Unemployment Insurance
- Pension Systems
, 2. Social Assistance
• Cash transfer programmes funded through general tax revenue (not
specific contributions)
• There is no requirement that you must contribute in order to qualify for this
benefit.
• This is targeted at vulnerable groups such as poor households, elderly
without savings or disabled individuals.
• Example:
- Old-age grant in SA
Key Di8erences
Social Insurance Social Assistance
Funded by payroll taxes Funded by general taxes
Contributory Non-contributory
Only contributors can benefit Anyone meeting certain criteria can
benefit
Linked to employment Targeted at vulnerable groups
* Developed countries ® rely on social insurance (high employment = more
contributors)
* Developing countries (SA) ® rely more on social assistance (higher
unemployment and informal sector)
Social Insurance
The Income Protection Role of Insurance
• Based on the principle of diminishing marginal utility:
The more you consume, each extra unit gives you less additional
satisfaction
• Therefore – people prefer stable consumption overtime rather than
fluctuating consumption (people derive more utility from a smooth path of
consumption than a variable one)
• Example: R300k + R300k (smooth) is preferred to R400k + R200k (uneven)
• This is the reason why individuals want to insure against income losses
cause by retirement, illness, jol loss etc.
