Insurance basically involves money. It
is a tool to reduce risk. For example, there is always a possibility that your
house will burn down. If you have no insurance, you may also not have sufficient
other assets to rebuild. With insurance coverage, the insurance payments will
help you rebuild.
There are several categories of insurance; casualty (damage to personal property such as houses or cars), life insurance (payments to beneficiaries on the insured's death), business continuity insurance (covering loss of business income from some accident or other catastrophe), liability (covers payments to individuals for perceived damage caused by the insured), health (covers hospital costs, physician charges, medication etc.), and retirement or pension (allows a continuity of income after retirement or other severance from a paying job).
For each category a monthly fee, known as a premium, is charged to the insured individual or group. The amount of the premium is determined by an actuary working for the insurance company. For each thousand dollars of risk that the insurance company will assume from the insured, he calculates the dollar amount of the premium which will cover the likelihood of risk that the company will have to make a payment and still include a profit for the company. Premiums from all insured persons or groups go into a pool from which payments are made by the insurance company. Those persons or groups, who have cumulatively paid little in premiums and have a subsequent payment from the company, will gain from the exchange. Those persons or groups, who have paid premiums for many years and have never claimed an insurance company payment, will have a loss from the exchange. However, the latter group will have reduced its risk of financial loss during that long period, in which insurance coverage was in force.
With that background, I would like to continue only with the matter of retirement insurance or pensions.
It has been determined by nature that human beings are most productive in their middle years. Therefore, society has established a system by which private enterprise and government do not involve employment with subsequent payment of wages or salaries to children or very old people. In the case of children, routine care is usually given by parents. In the case of very old people, routine care is many times given by grown middle-aged children, but there is a large proportion of old people who do not have that benefit. Therefore, a pension system was designed by companies such that retirees would continue to be paid a monthly subsistence amount after the employee reached a retirement age, generally 65 years. That is often called retirement, pension insurance, or an annuity.
Most companies use a retirement/pension program as an incentive to attract potential employees, who the companies perceive would be of value to their organizations. However, many of those companies are not sufficiently large to properly handle their own insurance pool, and contract the service to existing insurance companies. For each employee, the employer then pays to the insurance company a monthly premium. Usually this is not charged to the employee but is borne by the company as part of the employment benefit package. Those employees who reach the retirement age of 65 and are no longer receiving wages or salary from their employer, then receive monthly subsistence payments from the insurance company until they die. That practice is still in existence. Small business owners generally set up their own retirement program with an insurance company.
In the '30s, it was recognized by the Franklin Roosevelt Administration that not all working people were being covered by company pension programs, and that after retirement those persons were living in privation. While private charities were able to aid some support, the problem was large enough to force government recognition. The solution was to set up a mandatory retirement/pension program for every working individual. The premiums necessary to support the program were to be paid by the employees, who would eventually retire and draw benefits from the government insurance pool. The controlling agency was the Social Security Administration, which exists today. Working employees have mandatory Social Security premiums deducted from their paychecks, and self-employed persons similarly are required to contribute to the government insurance pool. At age 65, a nonworking individual, who previously paid Social Security premiums, is no longer required to pay premiums and starts to withdraw a monthly allowance known as Social Security. That continues until the individual's death, at which time Social Security payments are stopped. The key element here is that Social Security payments are benefits being paid by an insurance company after some years of the individual having paid premiums. It is by no means a welfare program in which a government payment would be made to an individual without that individual having previously made a financial contribution.
As in any insurance program, Social Security is a risk reduction program. Participation requires premium payments before any retirement benefits are paid to avoid privation. The main difference between Social Security and private annuity plans only involves the fact that Social Security premiums and inclusion in the program is mandatory for every working citizen. While private programs accomplish the same thing, they are not mandatory. It is also possible to have participation in Social Security and the simultaneous benefits of a private or company paid retirement program.
Critics of the Social Security plan have related it to a Ponzi scheme, which it is not. A Ponzi scheme is a voluntary investment program wherein the investor contributes a sum of money with the expectation of obtaining significant gains. In fact, he does so on paper but usually lets the proceeds ride in a continuing expectation of further increases. However, the operator of the scheme has no intention of carrying out this program interminably and after a while closes it down with confiscation of all the assets. In addition, the scheme operator never had the ability to actually make the claimed investment gains, and in effect was selling snake oil.
Conversely, the Social Security program is a legitimate operation for risk reduction. The participants in the mandatory program pay a premium for the probability of eventually receiving payments in their old age and avoiding privation. It is true that some individuals may have paid premiums for only a short period of time and reap considerable benefits from the pool if they have a long life. Conversely, there some individuals who may have paid mandatory premiums over a great many years and then died shortly after receiving only their early retirement benefits. However, that is the nature of insurance, as previously described. One pays for risk reduction. The similar case of apparent unfairness would be that a person pays fire insurance premiums on his house for a great many years and never has a claim against the insurance company, as mentioned in the first part of this write-up, but this lacks understanding of the basis of risk reduction through insurance.
There are several categories of insurance; casualty (damage to personal property such as houses or cars), life insurance (payments to beneficiaries on the insured's death), business continuity insurance (covering loss of business income from some accident or other catastrophe), liability (covers payments to individuals for perceived damage caused by the insured), health (covers hospital costs, physician charges, medication etc.), and retirement or pension (allows a continuity of income after retirement or other severance from a paying job).
For each category a monthly fee, known as a premium, is charged to the insured individual or group. The amount of the premium is determined by an actuary working for the insurance company. For each thousand dollars of risk that the insurance company will assume from the insured, he calculates the dollar amount of the premium which will cover the likelihood of risk that the company will have to make a payment and still include a profit for the company. Premiums from all insured persons or groups go into a pool from which payments are made by the insurance company. Those persons or groups, who have cumulatively paid little in premiums and have a subsequent payment from the company, will gain from the exchange. Those persons or groups, who have paid premiums for many years and have never claimed an insurance company payment, will have a loss from the exchange. However, the latter group will have reduced its risk of financial loss during that long period, in which insurance coverage was in force.
With that background, I would like to continue only with the matter of retirement insurance or pensions.
It has been determined by nature that human beings are most productive in their middle years. Therefore, society has established a system by which private enterprise and government do not involve employment with subsequent payment of wages or salaries to children or very old people. In the case of children, routine care is usually given by parents. In the case of very old people, routine care is many times given by grown middle-aged children, but there is a large proportion of old people who do not have that benefit. Therefore, a pension system was designed by companies such that retirees would continue to be paid a monthly subsistence amount after the employee reached a retirement age, generally 65 years. That is often called retirement, pension insurance, or an annuity.
Most companies use a retirement/pension program as an incentive to attract potential employees, who the companies perceive would be of value to their organizations. However, many of those companies are not sufficiently large to properly handle their own insurance pool, and contract the service to existing insurance companies. For each employee, the employer then pays to the insurance company a monthly premium. Usually this is not charged to the employee but is borne by the company as part of the employment benefit package. Those employees who reach the retirement age of 65 and are no longer receiving wages or salary from their employer, then receive monthly subsistence payments from the insurance company until they die. That practice is still in existence. Small business owners generally set up their own retirement program with an insurance company.
In the '30s, it was recognized by the Franklin Roosevelt Administration that not all working people were being covered by company pension programs, and that after retirement those persons were living in privation. While private charities were able to aid some support, the problem was large enough to force government recognition. The solution was to set up a mandatory retirement/pension program for every working individual. The premiums necessary to support the program were to be paid by the employees, who would eventually retire and draw benefits from the government insurance pool. The controlling agency was the Social Security Administration, which exists today. Working employees have mandatory Social Security premiums deducted from their paychecks, and self-employed persons similarly are required to contribute to the government insurance pool. At age 65, a nonworking individual, who previously paid Social Security premiums, is no longer required to pay premiums and starts to withdraw a monthly allowance known as Social Security. That continues until the individual's death, at which time Social Security payments are stopped. The key element here is that Social Security payments are benefits being paid by an insurance company after some years of the individual having paid premiums. It is by no means a welfare program in which a government payment would be made to an individual without that individual having previously made a financial contribution.
As in any insurance program, Social Security is a risk reduction program. Participation requires premium payments before any retirement benefits are paid to avoid privation. The main difference between Social Security and private annuity plans only involves the fact that Social Security premiums and inclusion in the program is mandatory for every working citizen. While private programs accomplish the same thing, they are not mandatory. It is also possible to have participation in Social Security and the simultaneous benefits of a private or company paid retirement program.
Critics of the Social Security plan have related it to a Ponzi scheme, which it is not. A Ponzi scheme is a voluntary investment program wherein the investor contributes a sum of money with the expectation of obtaining significant gains. In fact, he does so on paper but usually lets the proceeds ride in a continuing expectation of further increases. However, the operator of the scheme has no intention of carrying out this program interminably and after a while closes it down with confiscation of all the assets. In addition, the scheme operator never had the ability to actually make the claimed investment gains, and in effect was selling snake oil.
Conversely, the Social Security program is a legitimate operation for risk reduction. The participants in the mandatory program pay a premium for the probability of eventually receiving payments in their old age and avoiding privation. It is true that some individuals may have paid premiums for only a short period of time and reap considerable benefits from the pool if they have a long life. Conversely, there some individuals who may have paid mandatory premiums over a great many years and then died shortly after receiving only their early retirement benefits. However, that is the nature of insurance, as previously described. One pays for risk reduction. The similar case of apparent unfairness would be that a person pays fire insurance premiums on his house for a great many years and never has a claim against the insurance company, as mentioned in the first part of this write-up, but this lacks understanding of the basis of risk reduction through insurance.
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