CHAPTER 9
Social Insurance and Social Assistance
Social security (defined by international social security association)
→ “any programme of social protection established by legislation, or any other
mandatory arrangement, that provides individuals with a degree of income
security when faced with the contingencies of old-age, survivorship,
incapacity, disability, unemployment or rearing children”
→ may also offer access to medical care.
Social security
→ an umbrella concept that comprises both social insurance and social
assistance
→ protects citizens against effects of numerous contingencies → unemployment,
retirement etc.
→ refers to systems that enable consumption smoothing
→ provided by private or public sector
→ can be contributory or non-contributory.
Income-security related mechanisms of security systems → government attempts to
reduce income inequality and poverty.
Purposes
1. Protect persons who normally earn a sufficient amount to support themselves
against loss of income or fluctuations that would put their welfare at risk
(illness or unemployment).
2. Support persons who cannot earn enough to support and meet their basic
needs of consumption → e.g. children in poor homes, disabled persons who
cannot work, elderly who do not have savings.
,9.1 The two components of income security systems
1. Social insurance → compulsory contributions by workers and employers
a. No contribution = no benefits from these programmes → e.g. UIF, payroll
taxes.
b. Provided by the state but must contribute towards it.
2. Social assistance → cash transfer programmes funded by general tax revenue.
a. Benefits from these programmes are not limited to those who have
contributed → mostly attached to conditions → e.g. older person’s grant.
b. Eligible based on certain criteria → e.g. over a specific age = quality for
older person’s grant.
Developing economies → higher unemployment and informal sector participation
rates = constrained government capacity to use social insurance linked to formal
sector jobs as income protection means.
o More reliant on social assistance programmes than developed economies.
o Growth and extent of formal sector employment, fiscal resource
availability, ideological preferences, political power distribution, accidents
of history → shape the income security systems from these countries.
Private income security mechanisms:
1. Occupational insurance → mandatory that private sector workers to be under
their employer’s pension or provident funds.
o Workers receive benefits from returns on the contributions made by their
employer and themselves.
2. Informal/traditional/indigenous income security systems → interchange between
public and private income security arrangements in SA.
o Inter/intra-household transfers → e.g. remittances from migrant workers.
, 9.2 Social Insurance
Social insurance → involves the state getting involved → not like private
insurance.
9.2.1 Income protection role of insurance:
Law of diminishing marginal utility → marginal utility of consumption declines as
consumption increases.
o Due to the law → individuals will prefer to avoid income fluctuations →
they wish to derive more utility from a smooth path of consumption than a
variable one.
Methods of sustaining consumption levels during expected income losses →
drawing on savings, borrowing from banks/lenders or obtaining assistance from
charitable organisation, family, or friends.
o Not an option to all individuals or may be inadequate in periods of
prolonged/permanent income loss.
Insurance against income losses, caused by retirement, illness, job losses etc. →
alternate form of income protection.
o Paying insurance premium payments to insurers → pay amounts when the
insured suffers income losses caused by events covered in the insurance
contracts.
Consumption smoothing → individuals reduce their consumption in times of
plenty → enables them to sustain their levels of consumption in times of
economic hardship.
Example: income choices →(i) R300k per annum for two years; (ii) R400k in year
1 and R200k in year 2
o Rational individual → choose option (i) due to impact of law of diminishing
marginal utility.
Reason → for option (ii) → the extra utility derived from extra R100k
in year 1 is less than the sacrifice in utility for year 2 due to R100k
less income.
Social Insurance and Social Assistance
Social security (defined by international social security association)
→ “any programme of social protection established by legislation, or any other
mandatory arrangement, that provides individuals with a degree of income
security when faced with the contingencies of old-age, survivorship,
incapacity, disability, unemployment or rearing children”
→ may also offer access to medical care.
Social security
→ an umbrella concept that comprises both social insurance and social
assistance
→ protects citizens against effects of numerous contingencies → unemployment,
retirement etc.
→ refers to systems that enable consumption smoothing
→ provided by private or public sector
→ can be contributory or non-contributory.
Income-security related mechanisms of security systems → government attempts to
reduce income inequality and poverty.
Purposes
1. Protect persons who normally earn a sufficient amount to support themselves
against loss of income or fluctuations that would put their welfare at risk
(illness or unemployment).
2. Support persons who cannot earn enough to support and meet their basic
needs of consumption → e.g. children in poor homes, disabled persons who
cannot work, elderly who do not have savings.
,9.1 The two components of income security systems
1. Social insurance → compulsory contributions by workers and employers
a. No contribution = no benefits from these programmes → e.g. UIF, payroll
taxes.
b. Provided by the state but must contribute towards it.
2. Social assistance → cash transfer programmes funded by general tax revenue.
a. Benefits from these programmes are not limited to those who have
contributed → mostly attached to conditions → e.g. older person’s grant.
b. Eligible based on certain criteria → e.g. over a specific age = quality for
older person’s grant.
Developing economies → higher unemployment and informal sector participation
rates = constrained government capacity to use social insurance linked to formal
sector jobs as income protection means.
o More reliant on social assistance programmes than developed economies.
o Growth and extent of formal sector employment, fiscal resource
availability, ideological preferences, political power distribution, accidents
of history → shape the income security systems from these countries.
Private income security mechanisms:
1. Occupational insurance → mandatory that private sector workers to be under
their employer’s pension or provident funds.
o Workers receive benefits from returns on the contributions made by their
employer and themselves.
2. Informal/traditional/indigenous income security systems → interchange between
public and private income security arrangements in SA.
o Inter/intra-household transfers → e.g. remittances from migrant workers.
, 9.2 Social Insurance
Social insurance → involves the state getting involved → not like private
insurance.
9.2.1 Income protection role of insurance:
Law of diminishing marginal utility → marginal utility of consumption declines as
consumption increases.
o Due to the law → individuals will prefer to avoid income fluctuations →
they wish to derive more utility from a smooth path of consumption than a
variable one.
Methods of sustaining consumption levels during expected income losses →
drawing on savings, borrowing from banks/lenders or obtaining assistance from
charitable organisation, family, or friends.
o Not an option to all individuals or may be inadequate in periods of
prolonged/permanent income loss.
Insurance against income losses, caused by retirement, illness, job losses etc. →
alternate form of income protection.
o Paying insurance premium payments to insurers → pay amounts when the
insured suffers income losses caused by events covered in the insurance
contracts.
Consumption smoothing → individuals reduce their consumption in times of
plenty → enables them to sustain their levels of consumption in times of
economic hardship.
Example: income choices →(i) R300k per annum for two years; (ii) R400k in year
1 and R200k in year 2
o Rational individual → choose option (i) due to impact of law of diminishing
marginal utility.
Reason → for option (ii) → the extra utility derived from extra R100k
in year 1 is less than the sacrifice in utility for year 2 due to R100k
less income.
