Economics Volume II: Modern Economic Problems

by Frank A. Fetter

CHAPTER 23

SOCIAL INSURANCE

§ 1. Purpose and meaning of social insurance. § 2. Increasing need of social insurance. § 3. The new era of social insurance. § 4. Features of social insurance. § 5. Historical roots of accident insurance. § 6. Development of compensation for accidents. § 7. The compensation plan in America. § 8. Standards for a compensation law. § 9. Historical roots of sick-insurance. § 10. Need of sick-insurance in America. § 11. Old-age and invalidity pensions. § 12. Unemployment insurance. § 13. Need of ideals in social insurance. § 14. Insurance rather than penalty. § 15. The compulsory principle. § 16. State insurance and a unified system. § 17. The contributory principle.

§ 1. #Purpose and meaning of social insurance.# In importance surpassing at present any one of the various measures on behalf of the wage-earning class that have thus far been considered is the remarkable development now under way of plans and agencies to provide insurance for "the common man." Insurance means making some kind of provision out of present means, so as to reduce the injury and suffering that would result from a future mishap. Usually, likewise, it implies uniting with others to distribute the expense fairly over all in the group. Social insurance is the term most frequently applied to the various institutions and plans provided, more or less under the regulation of law, for the protection of the lower-paid workers in most modern countries. The terms industrial insurance and workingmen's insurance are likewise used. The principal types of events for which social insurance in its various branches provides, are (1) accident, (2) sickness, (3) incapacitation (either by old age or by invalidity, that is, permanent failure of health within the normal working years), (4) death (generally called "life" or "survivor" insurance), and (5) unemployment.

The direct aim of social insurance is not to prevent these mishaps (tho that may be an indirect result), but it is to provide some financial indemnity for the economic loss and expense involved in the mishap. The principal kinds of losses are two. First, that occasioned directly in caring for the sick or injured person, the expense of medical attention, nursing, hospital care, drugs and special apparatus such as crutches and glasses, and burial expenses. The second is the loss of income because of inability to work as a result of injury, of illness, or of permanent disability, or (in the case of life insurance) of the death of the bread-winner, or of want of employment.

§ 2. #Increasing need of social insurance.# In various connections we have observed how the changes that have been occurring in modern times have increased the uncertainties of the industrial life and of the earning power of the mass of the workers.[1] It should be further observed that in city conditions, a working family does not have, as in agricultural conditions, the supplementary sources of income from garden, field, forest, and stream, and it is not so possible to use the earning power of children, of old people, and of the partially disabled. The faster working pace of factories, the rapid fluctuations of employment with changing fashions, inventions, shifts of population, and waves of industrial prosperity and depression, all have introduced new risks and problems into the worker's life. The increasing payment of wages in money, and the more temporary nature of employment of men in many kinds of factory work, have added to the problem. With these changes have come a growing interest in the welfare of the mass of the workers and a growing sense of responsibility on the part of the public.

There is an appalling mass of misfortune in the United States requiring social insurance for its relief, altho satisfactory statistics of the various types of misfortune are still lacking. On the basis of the experience of private industrial insurance companies it appears that there are not less than 25.000 fatal industrial accidents yearly, and 700,000 injuries causing disability for more than four weeks, to say nothing of the enormous number of slight injuries—if injuries, many of them very painful, disabling for a period from one day to four weeks, should be called slight. As to loss of time due to illness, the experience of Germany shows an average of eight or nine days a year per worker, which figure, applied to those gainfully employed in America, would mean nearly 300,000,000 days of illness, or 1,000,000 one-man working years, causing a loss estimated to be $750,000,000 annually.

It is estimated that one on eighteen of American wage-workers attains the age of sixty-five with no financial provision for old age, and that about 1,250,000 persons above the age of sixty-five are dependent on their families or on charity, public or private, receiving $250,000,000 yearly.

The losses and suffering to dependents due to the death of the bread-winner are very partially accounted for by accidents, but no estimate of much value can now be made of the other cases. Some notion of the losses from unemployment has been given in discussing that subject in the preceding chapter.

§ 3. #The new era of social insurance.# Some not insignificant attempts to deal with these problems were made throughout the nineteenth century, but the new era of social insurance may be said to date from the message of the Emperor William to the German Reichstag in 1881, in which he said:

We consider it our imperial duty to impress upon the Reichstag the necessity of furthering the welfare of the working people…. In order to realize these views, a bill for the insurance of workmen against industrial accidents will first of all be laid before you; after which a supplementary measure will be submitted, providing for a general organization of industrial sick-relief insurance. Likewise, those who are disabled in consequence of old age, or invalidity, possess a well-founded claim to more relief on the part of the state than they have hitherto enjoyed.

The program here outlined was carried out by the enactment between 1883 and 1889 of a series of laws, which taken together constituted a pretty effective system of social insurance for the mass of wage-workers in the German Empire. Later amendments have extended and improved the various features of the plan, which has served as a stimulative example to other countries. America has been the tardiest among all the industrial nations to undertake this kind of social reform.

§ 4. #Features of social insurance.# The plans of social insurance, in force in various countries, present a great variety of features combined in many ways. The main characteristics in which they may differ relate to (1) the element of compulsion, (2) contributions by the insured, (3) the nature of the insurance organization.

Insurance may be voluntary or compulsory. It is voluntary when the state simply encourages the formation of insurance agencies, and perhaps contributes something to them, leaving it to the individuals to insure themselves as they choose, in mutual societies, or in privately managed companies. In the case of accident insurance, however, there is often a semi-compulsion by which the employer is requires to pay indemnity to his workers, according to fixed scales of compensation, but is left free to insure himself against this risk or not as he pleases, in which case it is still called voluntary insurance. Compulsory insurance is that which the state requires to be provided be means of some mutual organization of the insured, or of the employers, or by the state.

Insurance may be contributory or noncontributory. It is on the contributory plan when the insured workers contribute something toward the premiums that provide the funds for eventual payment. It is noncontributory when the funds are provided either by the employers or by the state without any payments from the insured.

Insurance may be (a) in private companies, carrying on the business for profit; or (b) in mutual companies of workingmen, or of employers insuring themselves against the cost of compensation in case of accident to their employees; or (c) in a state bureau, or fund, organized and conducted by government.

§ 5. #Historical roots of accident insurance#. The different kinds of social insurance had different origins, some knowledge of which is necessary to an understanding of the present situation. These origins still affect the nature of social insurance to-day, and have prevented the development of a truly unified and logical system in accord with present conceptions of needs and of justice.

Accident insurance had its beginnings in the liability of employers for accidents that happened as a result of the employer's negligence, a principle found to some degree in all countries. Thus the earlier payments to workers in cases of accidents were not insurance indemnity but merely damages collected in court for the fault of the employer. In Great Britain and the United States, indeed, by judicial interpretation the law grew more strict as against the claims of the workers, until about 1880 in Great Britain and 1910 in the United States. To collect damages it was not enough for the workman to prove the employer's negligence, for collection was made more difficult by (1) the doctrine of contributory negligence, (2) the doctrine of the assumption of risk, and (3) the fellow-servant doctrine.

By the doctrine of contributory negligence, the workman's claim could be defeated by showing that he had by his carelessness contributed to the accident even when the employer had been negligent. By the doctrine of assumption of risk the workman was presumed, in entering upon employment, to have taken upon himself the risks usually incident to the employment, including the chance of imperfections in the machinery, of which he might by some care have known. By the fellow-servant doctrine the employer was freed from responsibility for accidents due to the negligence of other employees, "fellow servants," even when it was impossible for him to know their character and reputation as in the case of a large factory or of a great railroad.

§ 6. #Development of compensation for accidents#. In some countries of continental Europe, notably Germany and France, the law of employers' liability was altered in favor of the worker early in the nineteenth century, so as to make compensation more usual and adequate. Since 1885, especially, this liability has been much further extended in many countries and in various directions, and yet the laws of accident compensation still retain many features of the old liability laws and remain in their legal character somewhat apart from the other branches of social insurance. Even in the newer type of "compensation" laws the indemnity paid by employers on account of accident is looked upon as commuted damages, but the old employers' defenses, just named, are abolished or made more difficult to plead. The new plan has the advantages of granting compensation by a schedule fixed in the law, insuring greater certainty, more adequate payments, greater ease of securing redress, and abolishing the cost of law suits. Still, in most countries and in most states in America, the worker has the option of suing under the old law. In some forty countries the principle of compensation by a prearranged schedule of rates has to some degree replaced that of litigation, and determination by a jury of the damages, in each separate case. The insurance spoken of in relation to accidents is technically that which the employers may or must take to protect themselves against loss, not that which the workman has.

The situation as to compensation in a few leading countries is as follows, the dates given being those of important legislation.

ACCIDENT INSURANCE

Voluntary (as to employers insuring, but compulsory compensation).

Great Britain, 1897, 1906, 1907.

France, 1898, 1907, (compulsory for seamen, 1898, 1905).

Denmark, 1898, 1908.

Belgium, 1903, (voluntary except for miners).

Compulsory insurance of their risks, by employers.

Belgium, for miners, 1868.

Germany, 1884, (in employers' associations), 1887, 1900,
1911 (voluntary for some classes).

Austria, 1887 (as in Germany), 1894 (voluntary for some
classes).

Norway, 1894 (in a state central insurance office), 1896.

Italy, 1898, 1904.

Holland, 1901 (in the Royal Bank or in private companies).

Sweden, 1901 (as in Norway).

§ 7. #The compensation plan in America#. Under the practical operation of the law of employers' liability in force in any American state until 1911, a very small proportion of the workers injured while at work were legally entitled to any indemnity, and a still smaller proportion could succeed in recovering any substantial amount. Employers, and the accident companies with which employers insured, either compromised the claims for small amounts or fought bitterly in the courts the claims of those who refused to compromise. When the courts awarded damages, large or small, a large part of the proceeds went for legal expenses. But a small proportion of the total costs to employers came as benefits to the victims of accidents. It appeared in an extensive investigation of the business of the large industrial insurance companies that but 28 per cent of the premiums paid by employers were paid to workmen as indemnity.

Between 1911 and 1916 the laws have been changed to some extent in their application to selected occupations in at least 34 states and territories of the United States, and covering nearly all but some of the distinctly agricultural states. This remarkable development has been largely actuated and guided by a comparatively small group of socially minded nonworking class citizens rather than by either employees or organized workers. It is an encouraging example of what can be done by skilful methods, when conditions are ripe, in furthering righteous social legislation without the use of money or of corrupting influences.

§ 8. #Standards for a compensation law#. The standards which, in detail, in one jurisdiction or another, have already been attained, and which are the provisional ideals now sought by reformers, may be briefly stated as follows.[2] All employments should be included, altho, as yet, there are various exceptions, such as farm labor and domestic service, employers with but few employees (the number excepted being one to five), and nonhazardous employments. Compensation should be granted for all injuries, suffered in the course of employment, that cause disability beyond a definite waiting period of three to seven days. Compensation should include medical attendance for a limited period, and two-thirds of the estimated loss of wages for disability, either total or partial, during its continuance; and, in case of death, funeral expenses, and from one to two-thirds of the estimated wages, to the widow (or dependent widower) and children, or to other dependent relatives. To secure the full benefit of the plan it must be made the exclusive remedy, replacing entirely the old remedy of suits for negligence. The employer should be required to insure his risk, and general sentiment is moving rapidly toward the plan of a state insurance bureau as the exclusive agency.[3] For the administration of the system an accident and insurance board should be created in each jurisdiction. Experience shows the importance of careful attention to numerous other details, and many amendments will be made as the needs become manifest in practice.

§ 9. #Historical roots of sick-insurance.# Sick-insurance had its origin partly in trade unions and in fraternal societies voluntarily organized by workers, and partly in the system of public poor relief. The voluntary societies were first recognized, regulated, and encouraged by law (in some cases being given state subsidies), and later, in some cases, being made compulsory for some classes of members (i.e., such as miners and seamen). On these institutions have been built the later state systems of social sick-insurance. This movement had made large headway by the end of the third quarter of the nineteenth century in various European countries. The two systems that are the most typical and influential examples are those of the German Empire and of Great Britain, the former local and the latter national in organization. The British plan of national health insurance promises to be on the whole of the greatest influence upon American opinion and policy. However, the best informed American students favor in some features the more decentralized German rather than the centralized British system. While it is impossible to describe the various systems in detail, the situation in the leading industrial countries of Europe may be indicated as follows.

SICK-INSURANCE

Voluntary.

France, 1850, 1898 (voluntary except for miners).
Belgium, 1851, 1894.
Italy, 1886.
Sweden, 1891.
Denmark, 1892.
Holland (authorized private societies and poor relief).

Compulsory.

Germany, 1883, 1911 (voluntary for others with earnings of $500).

Austria, 1888 (voluntary for some classes).

France, for miners, 1894.

Norway, 1909.

Great Britain, national system 1911 (was voluntary 1875-1911).

§ 10. #Need of sick-insurance in America#. Contrary to the usual opinion in America, the sick-insurance in Germany is, both in amount of contributions collected and in importance to the welfare of the workers and their families, of more importance than is either accident compensation or the system of invalidity pensions. Yet, thus far, our interest and efforts in America have been directed almost entirely toward the reform of accident compensation and almost everything remains to be done in the matter of social insurance against sickness. It is true that in recent years there has been a rapid development, in some of the larger cities, of medical insurance clubs conducted by private companies, with dues of ten cents weekly. They give medical care in ordinary cases, but require extra payments for surgical treatment and for medical supplies. They as yet touch only the outer fringe of the problem, but they testify to the need and to the increasing desire of the wage-workers for insurance of this kind. It is believed that at least 4 per cent of the income of wage-workers now is expended for the care of sickness and for burial insurance. The losses of wages meantime remain unequalized by insurance indemnities. A large proportion of the cases of temporary destitution in ordinarily self-supporting families is due to sickness. The German experience shows that 4 per cent of wages, collected in part from employers and in part from wage-workers, is sufficient to give a far better medical service than can be had through private effort, to give some indemnity for loss of wages, and to carry on a very useful hygienic work for the families and for the public health.

§ 11. #Old-age and invalidity pensions#. Insurance to provide pensions for old-age and permanent (partial or total) disability is in nature but an extension of the insurance against accident and sickness. In a relatively small number of cases accidents result in permanent disability and it is both illogical and inhumane to limit, arbitrarily, the compensation in such cases to a certain period, as two or three years, as is done in many compensation laws. The disability due to advancing years is in nature a chronic illness, inevitable, sooner or later, to all who survive. The movement to provide some indemnity in such cases has been rapid in European countries, doubtless because the problem was a very pressing one where the average earnings are low. In Germany and Austria this development has been more in connection with other forms of insurance; in Denmark, Great Britain, and France it has had more the aspect of an extension of poor relief. In the United States little has been done to provide for these great needs. Massachusetts in 1907 authorized savings banks to sell insurance and old-age pensions to those who applied. An increasing number of corporations, especially railroads, are adopting a pension system for men growing old in their service, but nothing has been done of a general public nature toward compulsory and universal protection against these misfortunes.

The following table shows the situation in some of the leading countries:

OLD AGE AND INVALIDITY PENSIONS

Voluntary.

Belgium, 1850, 1903 (voluntary except for miners).

Italy, 1898, 1907 (all wage earners).

Compulsory.

Belgium, for miners, 1868.

Germany, 1889, 1899, 1911.

Austria, 1889 (miners only); 1906 (office employees).

Denmark, 1891, 1908 (noncontributory).

France, for seamen 1850, 1881; for miners, 1894, 1905, 1907 (noncontributory, all indigent citizens); 1910 (contributory, all workmen and employees; was voluntary by laws 1850, 1886).

Great Britain, 1908 (noncontributory, old age pensions, granted by the government).

Sweden, 1913 (universal, contributory).

§ 12. #Unemployment insurance#. The most difficult of all the problems of insurance is that of unemployment. There the amount of the risk in any case is so largely dependent on the personal qualities of the worker. There are obvious objections to making the competent, steady, sober members of any trade bear the burden of the infirmities of their fellows. But, on the other hand, as we have seen,[4] a large part of the problem of unemployment is chargeable to social maladjustments rather than to individual faults.

At present development in this field is along two lines, that of subsidized trade-union relief (the Ghent system), and that of compulsory state insurance in certain industries. The former has been adopted by many cities and by some countries in western Europe, the public paying a certain proportion (from one sixth to one third) of the amounts of the benefits paid by the unions. Great Britain is the only country as yet to adopt a compulsory state system. It began operation in 1912, and applied to 2,500,000 persons, or one sixth of all the wage-earners. The contributions are made 3/8 by employers, 3/8 by wage-earners, and 2/8 by the state. There are several original and interesting features of the act, such as rewarding, by the refunding of dues, those employers that provide regular employment and older workmen that have received benefits amounting to less than their contributions. Its administration in close connection with the labor exchanges will give valuable experience in this field. The working out of the many minor problems of classification, assessment, and administration, of unemployment insurance, will require many more years of experimentation.

§ 13. #Need of ideals in social insurance#. The world has had nearly forty years of experimentation of a remarkably varied kind, in the field of social insurance, since the German system was inaugurated in the eighties of the nineteenth century. America stands almost at the beginning of a development along those lines that is certain to be of enormous extent and importance. It would be folly for us to repeat the costly errors of other countries by failing to recognize certain principles which have been clearly established by experience. If these could be grasped and firmly kept in mind our progress in this field in America would be faster, more certain, less costly, and farther reaching than it promises otherwise to be. We can here attempt no more than merely to outline these principles that must be embodied in an ideal system of social insurance in America.

§ 14. #Insurance rather than penalty#. The principle of social insurance rather than that of legal penalty should be universally recognized. At present, in all countries where the several kinds of insurance are found side by side, accidents are indemnified on plans that are still rooted in the notion of employers' liability for negligence; whereas, necessarily, the indemnity in case of sickness and of old age has no such explanation. The unfortunate result of this difference of view is that whereas all cases of sickness and invalidity entitle to benefits, only those accidents suffered "in the course of employment" are indemnified, and the worker is left unprotected in a large share of the accidents to which he is liable. The worker's need and the social need are thus not adequately met. We have started along the same line of development in America, and it is to be feared that only through a long series of legal fictions and contradictory judicial decisions shall we be able to work out toward consistency in this matter. Another unfortunate result of this difference is that accident compensation, being made peculiarly the task of the employers, does not develop the spirit of responsibility on the part of the workers and of coöperation between them and employers that other forms of insurance call forth, where representatives of both parties sit together in the administration of the system.

§ 15. #The compulsory principle#. Insurance must be general in its application to all the persons within broad wage-earning classes, and in order to be general it must necessarily be compulsory, not voluntary, in its application. To leave any form of insurance optional, or elective, with either employers or wage-workers, is to fail of the main purpose in a large proportion of the individual cases where it is most needed, and to increase the expense to those that are included. Within a compulsory system, however, there should be given wide opportunity for the voluntary principle by admitting to the system others that are not compelled to insure, and to enable any insured person to increase his paid-up, nonforfeitable insurance at any time by extra payments made at times of unusually high wages, from legacies, or from any other exceptional income.

§ 16. #State insurance and a unified system#. The state, through the public insurance office, must ultimately be the sole agency for insurance. Only in this way can the maximum of simplicity and economy be attained. Of course, this calls for a better appreciation of expert training, and a broader sentiment in favor of the merit system in the public service than we yet have in America.

There should be a unification of various kinds of insurance in one general plan and under one general administration for the whole state. This should be done with full regard to the actuarial differences in costs as among various kinds of insurance, various trades, various establishments, and, to some extent, even the various individuals, so as to ascertain the costs and to distribute them equitably.

Only in this way can provision be made for entire mobility of labor, so that men may not be bound, as a condition for obtaining benefits, to continue in the service of any one employer. To this end there should be interstate comity and coöperation, so that the insured could at any time transfer his actuarial equity from one state to another.

§ 17. #The contributory principle#. The contributory principle should be adopted, and both employers and wage-earners contribute to the cost in equal amounts. But further, the general public interests may be recognized through the payments in aid of the funds (subsidies, subventions). Both employers and employees usually seek to escape the burden, by getting the state to bear the whole expense[5] or by getting the other party to pay all or the larger part. But it is much to be desired that in large part the finances of a system of social insurance should be disassociated from the ordinary budgetary system of taxation and public expenditures. The fundamental reason why the premiums should be divided between employers and employees is that this is most favorable to the equal participation and coöperative efforts toward reducing the risk, and developing right industrial and political relations. Everywhere it is the practice to provide for representation nearly in proportion to contributions.

It is usually assumed by employers, by wage-workers, and by others in the discussion of the subject, that the burden remains and is borne by those who directly pay the premiums, and just in proportion to their payments. This is an almost utterly mistaken view. There is, on the contrary, every reason to believe that the general principles of shifting and incidence of taxation apply fully here.[6] It cannot be doubted that, if wages are not arbitrarily fixed, if they result, as we must believe, from an adjustment and equilibrium of the various classes of labor in a general economic situation, then after a time the premiums become a part of that general situation. Payments compulsorily made by employers (by all, without exception) will ultimately be offset by a lower wage, and if transferred to the workmen will ultimately be offset by a higher wage. Of course, there is some delay and friction in making the adjustment, but, under any settled policy, the adjustment once made will be maintained. The benefit of social insurance to the workingmen is not mainly that their wages are increased by the direct contributions of employers to the premiums, tho there are doubtless some cases of "parasitic" industries and parasitic employers that escape their due share of payments for risk, now that there is no insurance system. The great benefits are that total wages and losses are apportioned economically to the points of maximum utility; that accumulation of capital by and for the wage workers is made regular, automatic, safe, and in great amounts; and that financial aid, physical care, and mental relief from, some of the most tragic anxieties of life, are given effectively and economically to the masses of the people.

But, as has been indicated in another connection above, it is far from being a matter of indifference, psychologically, where the first, immediate burden of premium payment falls. The persons paying the premiums, in whole or in part, are far more keenly aware of the cost, and alive to reducing and removing the evil conditions. Moreover, their interest is stimulated by the fact that they are the first to gain by any temporary economies, and the more so because of the illusory belief sure to persist, that they are the ultimate as well as the immediate bearers of the costs.

The development of a complete system of social insurance along these lines promises to do more than any other single measure of practical social reform now under consideration to change the conditions and the outlook of the wage-earning class.

[Footnote 1: See above ch. 2, sec. 14; ch. 10, sec. 7; ch. 20, sec. 1; ch. 22, secs. 11-18.]

[Footnote 2: The American Association for Labor Legislation has issued a pamphlet describing these features more in detail.]

[Footnote 3: Thirteen states had, in 1916, state insurance funds, and, in five states (Oregon, Nevada, Washington, West Virginia, and Wyoming), they are the only insurance agencies allowed.]

[Footnote 4: Ch. 22, secs. 14-18.]

[Footnote 5: See examples in the lists of laws above cited, sec. 11.]

[Footnote 6: See above, ch. 16, sec. 14.]