This is an extract of our Social Insurance Unemployment Sickness And Disability document, which we sell as part of our The Economics of Public Expenditure Notes collection written by the top tier of University Of Birmingham students.
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Social Insurance: Unemployment, Sickness and Disability Historically the main aim of cash benefits was poverty relief particularly the prevention of absolute poverty. More recently the aim is to alleviate relative poverty. Insurance is concerned with protection against things like unemployment or ill health. Income smoothing relates to life cycles that affect income like retirement or child-bearing. Inequality reduction and administration efficiency are more controversial. INSTITUTIONS National insurance refers to benefits payable to people with the necessary contributions record. In economic terms it is an insurance scheme against income loss due to events like unemployment, ill health or old age. Contributions are made by employed and self-employed people. Benefits are awarded for several reasons. UNEMPLOYMENT In 1996 unemployment benefit and means-tested income support for the unemployed were replaced by JSA to people capable of work, available to work and actively seeking work. Benefit is paid on the basis of either a contributions record or a means test. The contributory benefit is payable for a maximum of six months. HEALTH-RELATED ABSENCE FROM WORK Statutory sick pay is administered by employers and the level of benefit depends on a contributions record and is taxable. Various groups are excluded - those below the lower earnings limit, the self-employed and those over pension age. Maternity pay is based on a contributions test for up to 18 weeks - the first 6 at 90% of the person's weekly earnings. Severe disablement allowance is a tax-free benefit for someone not able to work for at least 28 consecutive weeks due to ill health. COPING WITH DISABILITY Several benefits assist with the extra cost of living independently so are often paid irrespective of income or contributions record. Examples are disability living allowance, attendance allowance and disability working allowance. CARING FOR OTHERS There are a range of benefits available to at least partially compensate people who care for others. Invalid care allowance, guardian's allowance and increases for dependents. Benefit levels are reviewed regularly. DEMAND FOR INSURANCE Insurance is a device that offers individuals protection against risk, normally organised by the private sector. Insurance companies usually make a profit so a representative individual receives less in benefit in the long run than he pays in contributions. Individual demand A rational individual may choose to insure if he is risk averse. A risk averse individual is someone with diminishing marginal utility of income. His expected income and utility can be defined as;
Preferences are defined over income (Y), and the utility function (U) is strictly concave. The individual enjoys income level y facing a probability p of an income loss (L). He pays a gross premium of (p) for full insurance. Risk-pooling Individuals may face uncertainty but society can face approximate certainty. Relative certainty about the aggregate probability opens up to individuals the possibility of exploiting gains from trade by agreeing to pool risks. Each individual faces the same lottery: income y, probability (1-p) and income (y-L) and probability p. All individuals agree to put their incomes into a common pot. Independent incomes are pooled and hence the risk to individuals tends to 0 as N tends to infinity. By 'trading' individuals can acquire certainty.
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