The critical role of social insurance in the US and policies for reform

In 2021, The Hamilton Project has been doing a deep dive into social insurance in the United States. Our capstone analysis shows that social insurance plays a critical role for workers and families – both in times of crisis, as exhibited by the pandemic and ensuing economic recession, and in normal economic times. The social insurance system also helps buffer the economy when growth falters, supporting consumer purchasing power when income growth is weak.

To aid policymakers as they shift focus from providing immediate relief to building back the economy for the long term, we explore the role of social insurance and highlight policy proposals for reforms that would make vital and lasting improvements to the U.S. social insurance system.

What is social insurance?

As the Hamilton Project paper defines it, the social insurance system consists of a set of government programs that provide economic security in the short-term or provide services and benefits to improve economic opportunity in the long-term. The authors of the framing paper break down social insurance into five categories: (1) education and workforce development, (2) health coverage, (3) income support, (4) nutrition, and (5) shelter. In fiscal year 2019, the federal government spent $2.7 trillion (about 13 percent of the nation’s GDP) on social insurance programs. As illustrated by the figure below, the largest programs are income support –which includes Social Security– and health care programs.

Social insurance programs are delivered to eligible recipients in a variety of ways, including cash (such as tax refund checks), vouchers, insurance, or the provision of a particular good or service (such as a box of food or a rental unit in a public housing project). To read more about how the government determines eligibility and delivers program benefits for these programs, please see the framing paper here.

Social insurance has been shown to dramatically reduce rates of poverty in the US, especially among children and older adults. In 2019, social insurance programs cut the poverty rate in half — as measured under the anchored Supplemental Poverty Measure (SPM) — from 22 percent before certain program benefits are counted to 11 percent. However, inequality in the U.S. remains very high, especially when compared to other advanced OECD countries. The United States is not only among the countries with the greatest inequality before taxes and program benefits; it also is the country with the widest inequality after these policies are taken into account.

Proposals to improve social insurance in the U.S.

Over recent years, The Hamilton Project has commissioned a number of innovative and pragmatic policy proposals to improve social insurance programs. Various proposals aim to strengthen the system in areas where it is weak or has troubling gaps, to improve the targeting of various supports, or to make programs more efficient. Other proposals enable the system to perform better in reaching the most vulnerable families and individuals during both economic downturns and more stable economic times. Hamilton Project proposals also seek to make the system more responsive to the increases in need that occur during recessions, so the system can better support both households and the economy in those periods.

Workforce Development and Education

Despite the strong evidence in favor of investment in early childhood education and the expansion of early Head Start programs over the past decade, these programs are still not widely accessible. Prior to the pandemic, only 36 percent of eligible children aged three to five and 11 percent of eligible children under the age of three had access to Head Start or Early Head Start. A recent Hamilton Project-commissioned proposal by Elizabeth Davis and Aaron Sojourner advances strategies to expand access to high-quality, affordable early childhood care and education services by stimulating competition among eligible child-care providers. The proposal would cover costs of local child care providers to make it more affordable and accessible for low-income families.

In addition, workforce development investments can help re-train today’s workforce for the post-pandemic economy. A 2018 proposal by David Neumark would create a federally funded, place-based jobs program that would empower local partnerships to provide subsidized jobs in under-resourced communities. Other proposals include a Richard Arum and Mitchell Stevens piece titled Twin Proposals for the Future of Learning, Opportunity, and Work and a Harry Holzer paper outlining a More Coherent and Effective Workforce Development System in the United States.

Health

The United States primarily relies on a mixed health-care delivery system where most people are covered by either public insurance or employer-sponsored insurance, but millions are still left out and are uninsured. The federal government operates four main health insurance programs—Medicare, Medicaid, CHIP, and premium tax credits (which lower the cost of insurance purchased through the Affordable Care Act’s health-insurance marketplaces).

In a 2019 Hamilton Project proposal, Matthew Fiedler, Jason Furman, and Wilson Powell III show that Medicaid and CHIP could be improved by automatically increasing the federal share of Medicaid costs during economic downturns to help states absorb ‘fiscal shocks’ associated with temporary increases in enrollment. In addition, The Hamilton Project has released three proposals to expand paid leave, including a 2021 proposal by Tanya Byker and Elena Patel titled “A Proposal for a Federal Paid Parental and Medical Leave Program.”

Income Support

Income support programs serve to lessen poverty and hardship and help people deal with developments such as old age, disability, loss of a job, and raising children. These programs include Social Security, Unemployment Insurance, the Child Tax Credit, Earned Income Tax Credit, and Temporary Assistance for Needy Families, which provide support through direct cash payments, refundable tax credits, or tax reductions.

The pandemic and ensuing economic recession placed a spotlight on the inadequacies of one program in particular: the UI system required dramatic federal action to effectively help millions of unemployed workers. In a recent Hamilton Project policy proposal, Arindrajit Dube lays out a comprehensive plan to address many of the shortcomings in the unemployment insurance system through a revamped, fully federal UI system. A 2019 proposal by Gabriel Chodorow-Reich and John Coglianese also offers policy reforms to make UI a more effective automatic stabilizer during economic downturns.

Nutrition

The COVID-19 pandemic led to a sharp increase in households experiencing food insecurity. However, temporary expansions of government nutrition programs such as SNAP, WIC, and child nutrition programs provided resources to households and individuals to better support an adequate and healthy diet during the recession. For example, the creation of a temporary new food aid program, the Pandemic Electronic Benefit Transfer program, helped millions of families with children put food on the table through the pandemic.

Because SNAP is among the most efficient programs at expanding quickly and providing valued benefits during economic downturns, proposals allowing the program to expand further at the onset of economic slowdowns and to continue offering elevated benefits for the duration of downturns would boost the program’s efficacy as an automatic stabilizer. A 2019 proposal by Diane Schanzenbach and Hilary Hoynes highlights ways to tie SNAP benefits during recessions to automatic economic triggers. Other proposals including a 2013 piece by Diane Schanzenbach and a 2016 paper by James Ziliak would change how the Thrifty Food Plan, which USDA uses to determine SNAP benefit levels, is calculated so that SNAP can better meet participants’ nutritional needs.

Shelter

A range of housing assistance programs help make housing more affordable for renters and homeowners, such as the Housing Choice Voucher program, which provides subsidies that lower the cost of renting a unit of a family’s choice, as well as public housing and Section 8 Project Based Rental Assistance. However, existing funding for these programs is grossly insufficient to support low- to moderate-income renters, and access to these programs is limited, with long waiting lists in many areas. Only 25 percent of people with incomes low enough to qualify for federal rental assistance receive any such assistance.

In a recent Hamilton Project proposal, authors Robert Collinson, Ingrid Gould, and Ellen Benjamin Keys propose policies to bolster the housing safety net during recessions through the addition of automatic stabilizers to key federal housing programs. This would help renters and homeowners stay in their homes during downturns and promote the continued construction and renovation of affordable housing.

Conclusion

The social insurance system in the United States, implemented by federal, state, and local government agencies, provides protection against what President Franklin Delano Roosevelt called the vicissitudes of life: disability, the loss of earnings in old age, being laid off, and other setbacks. The social insurance system also provides support to help people meet basic needs and gain the skills and services they need to enter and succeed in the workforce. To learn more about the social insurance system, as well as proposals to improve it, read the full framing paper here.