Summary
This paper makes use of archival insurance coverage business knowledge from the interval 1861 to 1941 to make clear odd life insurance coverage, which was the first old-age financial savings mechanism of American households within the period earlier than Social Safety.
The paper discovered that:
- Atypical life insurance coverage was a tremendously standard financial savings automobile amongst American households of the late nineteenth and early Twentieth centuries. It was prevalent throughout races and socioeconomic strata and made up a big fraction of the common family’s financial savings.
- Atypical life insurance coverage – which paid lump sums or annuities to policyholders who survived to maturity or paid their beneficiaries if the policyholder died earlier – supplied a number of enticing options as a financial savings and funding product, amongst them comparatively low danger, affordable returns, the power to hedge towards downturns, and the power to borrow to clean consumption.
- The similarities and variations between odd life insurance policies and Social Safety assist clarify why the latter ultimately supplanted the previous. One key distinction with essential coverage and distributional implications is their interplay with inflation of the type that eroded the worth of odd life insurance policies (whose returns have been set in nominal phrases firstly of an typically 30-year contract) however that Social Safety funds, which turned extra widespread within the mid-Twentieth century, partially account for. The rise of peacetime inflation, together with different phenomena mentioned within the paper, helps clarify the transition from a voluntary and personal technique of old-age financial savings to a obligatory, nationalized one within the type of Social Safety.
- Standard misconceptions stem from a failure to understand the recognition and centrality of odd life insurance coverage as an old-age financial savings instrument within the nineteenth and early Twentieth centuries. Removed from being unprepared for retirement, most heads of family in the USA had, of their odd life insurance policies, an old-age financial savings plan in place that lined contingencies together with incapacity, early demise, and deflationary shocks. The Nice Melancholy didn’t wipe out their life financial savings and compel the creation of Social Safety; reasonably, the inflation that started throughout World Struggle II and continues to this present day did that. This reality helps make clear the issue that Social Safety initially tried to resolve.
- Collectively, each preliminary occupational carve-outs within the SSA that excluded many Black households from participation and the excessive ranges of Black participation in inflation-impacted odd life insurance coverage insurance policies indicate that the transition from odd life insurance coverage to Social Safety could have produced disparities in old-age financial savings and in wealth extra usually.
The coverage implications of the findings are:
- It’s helpful to have a full understanding of the context by which the Social Safety program was created by finding out the salience of odd life insurance coverage as a retirement financial savings automobile within the interval main as much as Social Safety’s adoption.
- One explicit function that Social Safety was higher positioned to offer was inflation safety (initially by way of advert hoc profit will increase and later by way of the adoption of the price of dwelling adjustment), as odd life insurance coverage was developed and thrived throughout an extended interval of secure costs.