Research Handbooks in Law and Economics series
Edited by Daniel Schwarcz and Peter Siegelman
Chapter 5: ‘Social insurance’, risk spreading, and redistribution
Record peacetime federal budget deficits, ominous projections for the growth of the national debt, and the rise of Tea Party conservatism have stimulated a national debate over the size of government, the role of government, and fiscal policy in the United States. In that debate, major domestic spending programs, beginning with Social Security and Medicare, play a starring role. The common perception, at least within the Beltway, is that these programs must be brought under control: spending on Social Security and Medicare together is projected to grow from 7.9 percent of gross domestic product (GDP) in 2013 to 11.3 percent of GDP over the next 25 years, or from 41 percent to 47 percent of total federal spending excluding interest payments on debt (CBO 2013b). Beyond the numbers, however, lies the more fundamental question of whether the federal government should be using these programs to shift resources among different segments of the population on such a vast scale. The most common defense of Social Security, Medicare, unemployment insurance, and similar government policies is that they constitute ‘social insurance’, commonly thought of as government-orchestrated protection against specific risks faced by most if not all people. This protection arguably increases social welfare for the same reasons that insurance is beneficial – that is, it increases the expected utility of risk-averse individuals.
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