ActSci
What is Financial Security
Financial security is part of a person’s overall welfare. It is a state of mind or a sense of well being by which a person is relatively certain that they can satisfy basic needs and wants, both present and future.
What is Financial Insecurity
Financial insecurity is the opposite of financial security. It occurs when aperson is unable to achieve a sense of well being due to a fear thatpresent and future needs will not be satisfied.
Some Causes of Financial Insecurity
- Old Age
- Premature Death
- Poor Health
- Inflation
- Unemployment
What are Life Annuities
- A life annuity provides guaranteed periodic payments for as long as the ensured lives.
- In return, the insured pays the insurance company premium.
What is the Three-Legged Stool
Different retirement income goals
- Age 80/120 rule
- The 4% rule
- The 70% replacement ratio
3 employer-sponsored pension plans
- Defined Benefit Plan (DB)
- Defined Contribution Plan (DC)
- Hybrid Plan
What is the Canada Pension Plan
The Canada Pension Plan (CPP) retirement pension is a monthly, taxable benefit that replaces part of your income when you retire.
Examples of protections against financial stress caused by poor health fromdifferent sources
- From the government: provincial healthcare program, workers
compensation, CPP disability benefits, etc.
- From the employer: group benefits, dental and vision coverage, extended health care, paid sick leave, etc.
- Individual: commercial health insurance, disability insurance
Examples of protections against financial stress caused by poor health fromdifferent sources
- From the government: CPP death benefit, CPP survivor’s pension, etc
- From the employer: group insurance
- Individual: individual insurance
4 different forms of income
- wages/salary
- savings/investments
- public or private transfer payments
- ownership of property
What is Real Income
- This is the amount of goods and services that can be purchased with income
- This can be affected by decreases in income, inflation, and regionaldifferences in cost of living
Examples of sources of financial insecurity
- insufficient income
- loss of income
- uncertainty of income
- additional expenses
What are Income-Maintenance Programs
provide money to at least partially replace income of individuals and families that have lost income as a result of:
- Death, disability, and old age
- Work-related injuries
- Unemployment
- Sickness and maternity
What are benefits in kind
provide direct services for hospitalization, medical care, and rehabilitation.
3 categories of income maintenance programs
- Employment-related programs
- Universal programs
- Means-tested programs
Employment Retlated Programs
- Eligibility for pensions and other periodic cash payments are generally based on the length of employment and self-employment
- For work-related injuries and family allowances, eligibility is established based on an employment relationship
- Benefits are based on the worker’s eligible earnings and are usually financed by contributions from eligible employees, employers, or both
Universal Programs
- Provides a flat cash benefit or tax break to individuals without regard to recipient’s income, employment or wealth
- Most countries also provide a second tier of benefits that are based on the worker’s earned income
- Financed by government general revenues and paid to individuals who meet a minimum residency period requirement
- In some countries, benefits are partially financed by contributions from workers and employers
Means-Tested Programs
- Eligibility for benefits is determined by measuring the individual’s or family’s financial resources against some standard measure of need, which is typically based on a subsistence level of income
- Applicants must meet a means test (aka needs test) and show that their income and financial resources are below the standard of need established for the program
- Typically financed out of general revenues of government
3 main sources of protection against potential impact
of financial insecurity
- individul plans/initiatives
- employer benefit plans
- social security programs (government)
individual plans/initiatives
- Purchasing insurance (life, health, disability, home, auto, ...)
- Savings and investments, both registered and non-registered
- Education to upgrade and improve job skills
- Earnings of other family members
- Assistance from children, relatives, and private charity organizations
employer benefits
- Group life and health insurance (including disability, sick leave)
- Pensions and group retirement savings plans
- Severance pay
- Employment-stabilization techniques, e.g., work-sharing arrangements
social security programs (government)
- Social insurance such as CPP, Employment Insurance, Workers’ Compensation
- Public assistance (welfare)
- Legislation to reduce financial insecurity such as provincial health care plans, standards for pensions and occupational safety and health, etc.
- Government policies including monetary policy, fiscal policy, job training, tax subsidies
- Others such as veterans’ benefits, public housing, energy assistance, student loans, etc.
general characteristics of social insurance
- Primarily financed by contributions from employers, employees, or both. Contributions are usually kept in special funds administered by the government and the benefits are paid from these funds
- The right to benefits is usually tied to the recipient’s past contributions or coverage under the program. The size of the benefit and
contributions usually varies according to a person’s prior earnings
- Participation and coverage is compulsory by law for certain categories of workers and employers
- Eligibility for benefits and size of benefits are prescribed by law
- There is a long-term plan in place for financing the current/future benefits
- The plan is not established by the government solely for its employees
Basic Principles and Characteristics of OASDI and CPP
1. Compulsory program
2. Provides minimum floor of protection
3. Emphasis on social adequacy vs. individual equity
4. Benefits loosely related to earnings
5. Rights to benefits with no means test
6. Self supporting contributory principle
7. No full funding
8. Benefits prescribed by law
9. Plan not established solely for government employees
compulsary programs
- Covers both healthy and unhealthy people
- This allows a basic floor of income protection to be provided at a reasonable cost to the masses
Why is “compulsory” an important characteristic for social insurance?
- If they were voluntary, some individuals would elect not to be covered and the objective of providing a basic floor would not be attained
- Large compulsory SI programs have the advantage over smaller programs that fewer random or accidental fluctuations in loss experience are likely to occur.
provides minimum floor of protection
- Philosophy is that individuals are primarily responsible for their own financial security (which is the case in most countries)
- Only a minimum benefit should be paid if government assistance is needed
- Benefit should be set at a level that, when combined with other income or insurance, an individual should be able to maintain a reasonable standard of living
- An important SI objective is to keep people off welfare
Emphasis on social adequacy rather than individual equity
- (Social adequacy) means benefits paid provide a certain standard of living to all contributors, i.e., a minimum floor of income to all groups
- (Individual equity) means contributors receive benefits directly related to
their contributions, i.e., value of benefits is closely related to the value of contributions
- Social adequacy results in benefits that are heavily weighted in favour of certain groups such as
- lower income groups
- larger families
- those near retirement when plan was introduced
- For these above groups of people, the concept of social adequacy means they will receive more in benefits than they put into the plan
- With emphasis on social adequacy, this results in social insurance redistributing wealth from one group to another
Benefits loosely related to earnings
- This means that some relationship exists between individual equity and social adequacy (still provides adequate benefits to lower income groups)
- Generally, the higher the worker’s earnings, the greater will be the
benefit for that person
- Rationale/reasons for benefits being related to earnings?
- Provides economic reward to workers earning higher income
- Takes into consideration regional differences in standard of living
Rights to benefits with no means test
- While “need” is recognized in the program, there is no “need” or “means” test
- individuals receive benefits regardless of income needs
- They only have to fulfill the eligibility requirements
- The right to receive benefits is a statutory right, NOT a contractual right and it is NOT an earned right
- Note though that government can modify benefits in any direction if there are sound reasons for it