Social security
Social security is a system of government programs designed to provide income or other financial protection to individuals and households against specified social and economic risks, including retirement, disability, unemployment, sickness, and loss of income following the death of a household provider.
Social-security systems vary substantially among countries. They may be financed through payroll contributions, general taxation, dedicated social-insurance contributions, or combinations of these mechanisms. Benefits may be contributory, means-tested, universal, or based on other eligibility criteria.
Objectives
The principal objectives of social security include:
- providing income during retirement;
- protecting individuals against disability;
- supporting households during unemployment;
- providing benefits following the death of an income provider;
- reducing poverty and economic insecurity;
- providing financial support during specified periods of need.
The specific objectives and coverage of a social-security system depend on its legal and institutional framework.
Major programs
Social-security systems may include programs providing:
- retirement benefits;
- disability benefits;
- unemployment benefits;
- survivor benefits;
- sickness benefits;
- family or child benefits;
- housing or income-support benefits;
- healthcare-related benefits.
Not every country includes all of these programs within its social-security system.
Social insurance
Social insurance is a major component of many social-security systems.
Under a social-insurance arrangement, individuals or employers generally contribute to a public or regulated insurance system, and eligible participants receive benefits when specified conditions are met.
Examples may include:
- old-age pensions;
- disability insurance;
- unemployment insurance;
- survivor benefits.
Social insurance differs from purely private insurance because it is generally established and regulated through public institutions and may involve mandatory participation.
Retirement benefits
Retirement benefits provide income to eligible individuals after they reach a specified age or satisfy other eligibility requirements.
A retirement benefit may be based on factors such as:
- contribution history;
- earnings;
- years of employment;
- age;
- statutory benefit formulas.
Social-security retirement benefits may form one component of an individual's overall retirement income alongside pensions, personal savings, investments, and other sources.
Disability benefits
Disability benefits provide financial support to individuals who meet specified criteria relating to disability or reduced ability to work.
Eligibility requirements vary among jurisdictions and may involve assessments of medical conditions, work capacity, contribution history, or other statutory requirements.
Survivor benefits
Survivor benefits provide financial support to eligible family members or dependants following the death of a covered individual.
Eligibility and benefit amounts may depend on:
- the deceased individual's contribution or employment history;
- the relationship to the deceased;
- age;
- dependency;
- applicable statutory requirements.
Unemployment benefits
Unemployment benefits provide temporary financial support to eligible individuals who lose employment and satisfy specified conditions.
Such programs may be financed through employer and employee contributions, government revenue, or a combination of funding sources.
Financing
Social-security systems can be financed through several mechanisms, including:
- payroll taxes;
- social-insurance contributions;
- general government revenue;
- employer contributions;
- employee contributions;
- dedicated taxes.
Some systems use a combination of these mechanisms.
Pay-as-you-go systems
A pay-as-you-go (PAYG) pension system generally uses current contributions or tax revenues to finance benefits paid to current beneficiaries.
A simplified representation is:
The financial sustainability of a PAYG system can be influenced by factors such as:
- the number of contributors;
- the number of beneficiaries;
- employment levels;
- wage growth;
- benefit levels;
- demographic changes.
Funded systems
A funded social-security or pension arrangement accumulates financial assets that are intended to finance future benefits.
The accumulated assets may be invested in financial markets or other permitted investments.
Funded arrangements may therefore involve:
- investment returns;
- asset allocation;
- investment risk;
- liquidity management;
- asset-liability management.
Eligibility
Eligibility requirements differ among social-security programs.
They may depend on:
- age;
- employment history;
- contribution history;
- income;
- disability status;
- family circumstances;
- residency or citizenship;
- other statutory conditions.
Benefits and replacement rates
A social-security benefit may replace part of an individual's previous earnings.
A simplified replacement rate can be expressed as:
Replacement rates vary according to the design of the social-security system and the individual's earnings and contribution history.
Social security and pensions
Social security and pensions are closely related but are not necessarily identical.
A pension generally refers to a retirement-income arrangement, while social security is a broader concept encompassing government programs addressing multiple social and economic risks.
A country's public retirement benefit may form part of its social-security system.
Social security and pension plans
A Pension plan may be sponsored by an employer, government, or other organization and may operate alongside a public social-security program.
Individuals may therefore receive retirement income from several sources, such as:
- social-security benefits;
- employer-sponsored pensions;
- defined contribution plans;
- personal investments;
- savings;
- annuities.
Social security and retirement
Retirement planning often considers expected social-security benefits as one component of future retirement income.
The amount of support available depends on the individual's eligibility, contribution history, retirement age, and the rules of the applicable social-security system.
Demographic considerations
Social-security systems can be affected by demographic changes.
Factors such as:
- population ageing;
- fertility rates;
- life expectancy;
- migration;
- employment levels
can influence the relationship between contributors and beneficiaries.
These factors are particularly important for PAYG systems.
Fiscal considerations
Social-security programs can have significant implications for government budgets and public finances.
Governments may need to consider:
- contribution revenues;
- benefit expenditures;
- demographic trends;
- fiscal sustainability;
- public debt;
- taxation;
- benefit eligibility.
The fiscal structure differs substantially among countries and individual programs.
Social security reform
Governments may modify social-security systems in response to demographic, economic, or fiscal pressures.
Potential reforms include:
- changing retirement ages;
- modifying contribution rates;
- changing benefit formulas;
- altering eligibility requirements;
- introducing or expanding funded components;
- changing taxation;
- modifying benefit indexation.
The effects of reforms depend on the specific design and population affected.
Importance
Social security is a major component of public social-protection systems. By providing financial support against risks such as retirement, disability, unemployment, and loss of household income, social-security programs can reduce economic insecurity and provide income protection across different stages of life.