Financial mechanism of social insurance - Insurance

2.2.2. Financial mechanism of social insurance

In addition to the fact that social insurance is an important element of social protection of the population, it is also a special financial system. The main components of the financial system of social insurance are: the payment of insurance premiums, the creation of social insurance funds, the implementation of social payments (Figure 2.5).

Fig. 2.5. Financial mechanism of social insurance

Specificity of any insurance mechanism is to create trust funds to protect the property interests of participants of these funds. In terms of their economic content, social insurance funds have the same insurance nature. However, the compulsory and socially regulated nature of these funds has brought certain features to their organization and practical functioning:

- obligatory participation of employers in payment of insurance premiums;

- setting limited in order to implement the principle of social solidarity of the equivalence between contributions and payments;

- determination of the size, procedure for calculating contributions and payments and other significant insurance conditions by the norms of state legislation;

- the presence of mandatory state responsibility for financial stability and solvency of the social insurance system, including the provision of state subsidies and subsidies;

- the control of funds by public authorities.

Initially, financial participation of the state in social insurance was not expected. However, due to social and political factors, the state was forced to connect to the financing of the insurance system, which was determined by the following circumstances:

- the need to pay insurance premiums for those categories of the population who did not have a working income, but needed social assistance (children, pensioners, unemployed);

- the provision of additional funds for social payments in increased amounts to those citizens who, due to the specific nature of their work and social status, required higher social guarantees (occupations of high risk, citizens living in special territorial zones, etc.)

- obligations of state regulation of social insurance, which implied direct subsidization of the budget of the system with justified shortage of own funds.

In any case, the financial involvement of the state was dictated mainly by the assumption of new social functions to protect the necessary standard of living of the population, which has now become the main sign of a socially-oriented economy. First, the achievement of social stability required an additional redistribution of income in the social insurance system, not only in accordance with the effect of social risks, but also taking into account the material situation of the insured. Secondly, the state was forced to adjust the measure of compensation for damage to certain standards, limiting the social burden on the economy.

Social insurance is not just mandatory insurance of social risks of citizens, but socially oriented compulsory insurance of the main contingent of the population against social risks determined by state social policy.

The less the principle of equivalence of insurance contributions and social payments is violated, the closer the financial mechanism of social insurance to the actual "insurance" mechanism. The more the principle of solidarity is used as opposed to the equivalence between insurance premiums and payments, the closer the mechanism of social insurance to state budgetary social security (Table 2.3).

Table 2.3. Financial sources of budgets of social insurance funds

Financial sources determined by insurance relations

Financial sources determined by imperative relations

Employee Contributions

State Budget Subsidies

Insurance Contributions by Employers

Targeted subsidies to the state budget

Insurance premiums of the state

Special target taxes

Funds reimbursed to insurers as a result of application of recourse requirements to persons guilty of causing damage to the insured

Target deductions from insurance premiums for commercial insurance

Investment income from the placement of temporarily free funds

Penalties and fines

Insurance funds are created according to certain rules and pursue the goal of maximum compensation of risks with the minimum necessary costs of participants in the insurance scheme. Social insurance uses two methods of covering risks: 1) the distribution of probable damage among all participants of the fund through the advance payment of contributions; 2) capitalization, providing for individual accumulation of contributions of each of the participants at the time of insurance payment. Capitalization in insurance is not used as an independent mechanism, but only in combination with distribution. This means that part of the contributions goes to the so-called risk fund, whose funds are directed to insurance payments to those insured who, due to the early onset of risk, could not accumulate their individual insurance fund. The capitalization mechanism is applied mainly to long-term types of insurance, for example, pension insurance.

The method of forming insurance funds, based on the distribution of damage, in social insurance is called "pay-as-you-go", i.e. Current expenses are due to current income.

The method of forming insurance funds based on accumulation has several names: "funded system", "capitalization", "individual savings account system". Insurance payments will be equal to paid insurance premiums, increased by a certain rate of return or, on the contrary, insurance premiums will depend on the size of planned payments taking into account discounting.

There are objective factors limiting the use of funded insurance systems to cover social risks on a national scale, which many modern economists point out.

First, capitalization implies a significant excess of income over expenditures in insurance funds, so that there will always be temporarily free money for investment, and in the long term. Otherwise, the risk fund for covering payments in favor of modern beneficiaries in the capitalized system will not give an opportunity to form individual insurance funds.

Secondly, significant restrictions on capitalization on a long-term scale are exerted by inflation and wage growth. Before the funded systems, it is difficult to solve the task of maintaining the modern cost of contributions and payments. Produced deductions from wages, taking into account investment income, should in the future provide the same purchasing power as when the premium is paid.

Thirdly, the most likely state-regulated system of social insurance for an investment tool will be government securities, which are also a serious debt obligation of the state. Consequently, the economically active population will have to pay not only its future payments, but also the investment income guaranteed by government securities, i.e. the tax burden will objectively increase.

Fourthly, taking into account the socially oriented nature of social insurance, it must be borne in mind that the state has the right to legislatively adjust the level of social payments depending on the current financial situation or current social priorities. The state's establishment of social standards to cover social risks can negate the entire individuality of savings.

Contributions to social insurance are periodic payments made by statutory groups of the population, economic entities and, where necessary, by the state, accumulated in special funds for social protection purposes.

Contributions to social insurance are often identified with either taxes or insurance premiums in commercial insurance. This identification is logical in form, but it is not legitimate in nature (Figure 2.6). Contributions to social insurance and taxes combine the nature and procedure for their payment. Insurance premiums and contributions are identical according to the principle of repayment and equivalence. However, equivalence in social insurance is substantially limited by the principles of social regulation.

Fig. 2.6. General and differences between taxes, social insurance contributions and insurance premiums

In 2001, in order to include social insurance contributions in the US Tax Code, they were equated to taxes and combined into a single social tax (since 2010 the UST has been replaced by insurance contributions again). However, the purely tax interpretation of payments for social insurance is illegal not only from a financial point of view, but also from a legal point of view. It completely eliminates insurance relations, alienates insurance funds to the state budget, thereby allowing the state to implement social protection on the basis of social security according to need, rather than on insurance equivalence of contributions and payments.

Traditionally, the division of responsibility for the payment of insurance premiums between employees and employers exists in all Western countries, demonstrating the joint responsibility of the employee and his employer in financing the necessary social assistance. The proportions for dividing the mandatory responsibility for paying contributions between employers and employees vary from country to country. In general, employer contributions predominate, although there are systems with a classical distribution - 50:50 (as in Germany, Great Britain) or close to it (in the Netherlands, Austria).

The basis for assessing social security contributions is usually wages , and the contribution rates are set as a percentage. Their significance varies significantly by country: from 24.4% in the UK to 55% in Italy and the Netherlands. Less often, fixed rates are applied in absolute monetary terms.


In the 1980s. The possibility of choosing other financial sources of social insurance was actively discussed. Attempts have been made to replace wages as the basis of premiums for value added, and the contributions themselves to the value-added tax (VAT). However, in practice, the replacement of VAT premiums has not been fully implemented anywhere. So, in 1980 in Argentina, employers' contributions were replaced by an increase in the VAT rate. In Belgium, the decrease in employee contributions was made by granting subsidies from the state budget, covered by an appropriate increase in VAT. In Portugal, since 1996, VAT has been increased by 1%, which is used exclusively for social insurance purposes. In Denmark, contributions in the absolute amount are set depending on the turnover that is subject to VAT, but only for the employer, employees pay contributions from earnings. However, VAT as an alternative method of financing social protection has not yet become widespread.

The system of social payments that has developed in social insurance, despite the diversity of specific types and names, basically has a fairly traditional and uncomplicated structure.

According to the temporary nature of all payments are divided:

- for one-time;

- periodic;

are constants.

Lump-sum payments are associated with single risk events and are paid once by the full amount, compensating for the damage. In foreign practice, such payments are called grants. Periodic payments cover recurrent and time-consuming risk events and are mainly related to temporary disability and unemployment. Permanent payments are appointed for life or for a very long period and are associated with permanent disability. Such payments have a common name - pensions.

The form of payment can be:

- cash;

- natural;

- in the form of payment for social services.

Basically, in social insurance, cash payments are used. However, sometimes such natural forms of assistance are used, such as children's gifts, food kits, and the provision of medicines. The payment of social services implies protection of individual incomes of insured citizens against unforeseen expenses in the event of risk due to the free provision of various types of assistance. Social services are used in various kinds by all branches of social insurance.

According to the calculation methods, social payments are divided:

- to fixed;

- calculated.

Fixed payments are firmly established, absolute amounts of cash that do not depend on the amount of lost income are equal for all insured and are determined only by the fact of occurrence of a risk event. Sometimes, not one payout size is used, but some scale of values ​​that are applied to certain population groups. Settlement payments are determined based on lost earnings. Usually, in order to calculate the amount of such benefits or pensions, take into account the length of service, the family status, the number of dependents in the family, and some more particular characteristics.

In each branch of social insurance, the above types of social benefits objectively acquire significant functional characteristics, which ultimately determines the functional independence of each industry and allows it to fully meet the challenges of protecting the population from specific types of social risks.

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