Saturday, March 19, 2005
American Social Security System - Lessons for a developing country?
As the difference between the average life span and average retirement age has moved from a negative number in 1939 (when social security was introduced) to around 15 today, it is no surprise that outflows will soon be higher than inflows. With that in perspective, let us revisit the origins of social security. I quote from an interesting essay.
The earliest known use of the term “social security”—albeit as an abstract concept—was by Simón Bolivar, the South American revolutionary and politician, in an 1819 speech about the proper functions of government.
Today, in the US, Social Security is a combination of three social insurance programs: retirement insurance (originally known as old-age insurance), survivor insurance, and disability insurance. Should something like this be introduced in India? First, note is that such a scheme is nothing new:
Social security-like government programs had already been around for two millennia. Confucius, who lived from 551 to 479 BCE, wrote that the Chinese empire of his time provided “regular allowances” to orphans, widows and widowers, and “old men without sons.” Imperial Germany began the first modern social insurance system under the auspices of Chancellor Otto von Bismarck. As a countermeasure to more radically socialistic proposals, Bismarck established mandatory old-age and invalidity (disability) insurance in 1889. Great Britain started unemployment and disability insurance in 1911 and added old-age and survivors insurance in 1925. By 1933, at least 39 countries operated social security programs of some kind for old-age and/or unemployment. Belgium, Bulgaria, Czechoslovakia, France, Germany, Great Britain, Greece, Hungary, Luxembourg, Netherlands, Poland, and the USSR all had compulsory social insurance for old-age, disability, and survivors—social security systems more advanced than the American system would be until 1956.
Second, it is also important to note that social security was introduced in America at a time when, beginning in 1880, America gradually changed from rural to urban, and from agricultural to industrial. As a result, the family farm with its multi-generational extended family—a traditional source of economic security for the aged and disabled—began to disappear. As Seager (a professor of political economy at Columbia University and author of one of the first books on the subject) notes
In the country household there is a place for the aged parent or grandparent. The family has a settled abode, and economic interest reinforces filial regard in securing to old people proper care and consideration. So long as any strength remains, there is useful work about the house or farm which they may do. Moreover, the cost of maintaining an aged relative in the country is so small as to seem an insignificant burden. In the crowded tenement house of modern cities the situation is very different.
As India moves in this direction, with smaller families and more urbanization, perhaps there is a need for social security then? This is not so clear – for one, individual saving goes down when social security is in place. So the total saving in the economy might still be the same.
Also, adults may now have lesser incentives to have offsprings (the countries with social security have some of the fastest aging populations). So in some sense, there might be a perverse effect of accelerating the disintegration of a family system. Even abstaining from any ethical arguments, this can have important implications for development (much has been said, though not enough, on the effect of China’s aging population on its future growth). Finally, this can cast doubt on the sustainability of social security programs. Remember outflows will then outweigh inflows, a problem US now tries to handle.
The issue is clearly not simple enough to be captured in a few paragraphs but here's a start.
The earliest known use of the term “social security”—albeit as an abstract concept—was by Simón Bolivar, the South American revolutionary and politician, in an 1819 speech about the proper functions of government.
Today, in the US, Social Security is a combination of three social insurance programs: retirement insurance (originally known as old-age insurance), survivor insurance, and disability insurance. Should something like this be introduced in India? First, note is that such a scheme is nothing new:
Social security-like government programs had already been around for two millennia. Confucius, who lived from 551 to 479 BCE, wrote that the Chinese empire of his time provided “regular allowances” to orphans, widows and widowers, and “old men without sons.” Imperial Germany began the first modern social insurance system under the auspices of Chancellor Otto von Bismarck. As a countermeasure to more radically socialistic proposals, Bismarck established mandatory old-age and invalidity (disability) insurance in 1889. Great Britain started unemployment and disability insurance in 1911 and added old-age and survivors insurance in 1925. By 1933, at least 39 countries operated social security programs of some kind for old-age and/or unemployment. Belgium, Bulgaria, Czechoslovakia, France, Germany, Great Britain, Greece, Hungary, Luxembourg, Netherlands, Poland, and the USSR all had compulsory social insurance for old-age, disability, and survivors—social security systems more advanced than the American system would be until 1956.
Second, it is also important to note that social security was introduced in America at a time when, beginning in 1880, America gradually changed from rural to urban, and from agricultural to industrial. As a result, the family farm with its multi-generational extended family—a traditional source of economic security for the aged and disabled—began to disappear. As Seager (a professor of political economy at Columbia University and author of one of the first books on the subject) notes
In the country household there is a place for the aged parent or grandparent. The family has a settled abode, and economic interest reinforces filial regard in securing to old people proper care and consideration. So long as any strength remains, there is useful work about the house or farm which they may do. Moreover, the cost of maintaining an aged relative in the country is so small as to seem an insignificant burden. In the crowded tenement house of modern cities the situation is very different.
As India moves in this direction, with smaller families and more urbanization, perhaps there is a need for social security then? This is not so clear – for one, individual saving goes down when social security is in place. So the total saving in the economy might still be the same.
Also, adults may now have lesser incentives to have offsprings (the countries with social security have some of the fastest aging populations). So in some sense, there might be a perverse effect of accelerating the disintegration of a family system. Even abstaining from any ethical arguments, this can have important implications for development (much has been said, though not enough, on the effect of China’s aging population on its future growth). Finally, this can cast doubt on the sustainability of social security programs. Remember outflows will then outweigh inflows, a problem US now tries to handle.
The issue is clearly not simple enough to be captured in a few paragraphs but here's a start.
