Finance SOCIAL INSURANCE SYSTEMS

Finance Lecture outline  Healthcare insurance system  Retirement insurance system  Unemployment insurance system

Finance Social insurance system(1)  A system which is aimed at providing benefits to a defined population in case of the occurrence of defined events

Social insurance system (2)  Usually government funded systems  Government funded means that the system is sponsored by compulsory contributions of the citizens who participate in the system  The system constitutes an insurance against the risk of distavantangous social situations Finance

Social security system - elements  Healthcare system  Pension system  Unemployment benefits  Other social aid eg. welfare provisions, disability insurance

Finance The goals of the healthcare system  Provision of healthcare services  Improvement of the society’s health  Financing of healthcare services

Healthcare system participants  Contributors  Patients  Financing institutions  Regulating and supervisory institutions Finance

Healthcare system revenue  Taxes  Compulsory healthcare contributions  Payments for healthcare services  Charity payments

Finance Public healthcare systems  Public healthcare systems impose a financial burden on the employers  As a consequence the costs of employment increase  In many economies eg. Poland this constitutes a barrier in increasing employment  A potential solution are private healthcare systems

Finance Private healthcare systems  Private healthcare systems are not compulsory  Usually they cover only a part of healthcare services therefore they are complementary to the public healthcare systems  Individual citizens can purchase private health insurance

Finance Healthcare system models (1)  Various healthcare systems around the world  Depending on the economic model pursued

Finance Healthcare system models (2)  Healthcare system model defined by:  The way of financing  The organisation of the system- direct or indirect payments  Ownership of the insurance company-public or private

Finance Examples of healthcare models  National Health System in the UK- funded by taxes, single payer system  Social Insurance System in Germany or Poland- funded by compulsory contributions  Voluntary Contributions in the USA

Finance Pension systems  Pension systems as retirement finance planning  Pension systems can be planned by employers, insurance companies, the government employer associations, trade unions

Finance Pension system models  Defined benefit unfunded system (Pay as you go system)  Defined benefit funded system  Defined contribution  Mixed system

Finance Pay as you go system (1)  A defined benefit system  The retirement payment is computed according to a fixed formula  The payment depends on the member's salary and the number of years' membership in the plan

Pay as you go system (2)  Current pensions are financed by current contributions  There is no additional funding of the system  Ageing of the population creates a constraint for the system  Countries can deal with this problem either by expending other budgetary resources or by introducing funded systems Finance

Age related government expenditure Source: Stephen G Cecchetti, M S Mohanty and Fabrizio Zampolli, The future of public debt: prospects and implications, BIS Working Paper 2010.

Pay as you go system-examples  The majority of the European countries  Although some of the countries switched to a defined benefit funded system- eg. Spain or France Finance

Defined benefit funded system (1)  The funds are accummulated and managed by assigned institutions eg. In Poland Demografic Reserve Fund, in Spain the Social Security Reserve Fund  The funds are invested and the gains from the investment are expected to cover the retirement payments

Finance Defined benefit funded system (2)  Usually based on two tiers- the pay-as-you go Tier 1 and funded Tier 2  There is no guarantee that the investments of the funds will cover the necessary retirement payments

Finance The defined contribution system  The individual participants pay specified contributions to their account  The funds accummulated from the contributions are invested on the financial markets  At the moment of retirement the accummuluted funds become available to the individual

Finance The defined contribution system- examples  Poland- three tiers of the pension system- the first is a defined benefit funded system, the second a defined contribution compulsory system, the third a defined contribution voluntary system

Finance Regulation of pension systems  In many countries pension system are government funded and compulsory (European countries)  In some countries it is up to the employer or employee which system to choose (eg. United States)

Finance Unemployment benefits  Largely depending on labour market policy  Active labour market policy- mesures aimed at creating employment eg. traineeships, education  Passive labour market policy- the payment of unemployment benefits

Finance Labour market policy

Finance Social expenses Source: Eurostat

Finance Literature R.W.Melicher, E.A.Norton, Introduction to Finance. Markets, Investments and Financial Management, John Wiley&Sons,2007