ARE RESERVES NECESSARY IN SOCIAL INSURANCE?
To many persons the word insurance means a reserve. Long experience with life insurance has taught state legislatures that actuarial reserves are essential for the financial security of the policy holders, and they have required them. As a matter of fact, many persons know the actuarial reserve under its more common designation legal reserve. Is there any necessity for legal reserves in social insurance? The question is of great significance only with respect to old-age annuities. We shall therefore discuss reserves in connection with old age first and then take up their place in unemployment, health, and disability.
Let it be assumed first that the government has decided that every old person in the country is immediately to have a pension of, say, $30 a month regardless of means. The legislators take the position that whatever arrangements they may make for financing the system, the aged of today must be supplied by the workers of today with food, clothing, services, and shelter. The legislature makes no distinction between present-day workers who will hereafter pay taxes earmarked for old-age insurance, and retired workers who in their working years never paid an old-age tax because the legislators of their day never imposed one. The retired persons paid the taxes their legislatures imposed, direct and indirect; many of them supported their parents in old age when support from earnings was mainly a moral and social obligation and not enforced by law, and they worked and supported their children. Government thus draws no dividing line between present workers and retired workers.
Under such a system there is no necessity whatever for a reserve. The financial security of the aged is legally assured by the legislature. The money to pay the benefits is collected each