A common motif on the American left is that Social Security is not an investment, it is insurance, as are pensions offered by the state to their employees.
It sounds good, but it shows a deep misunderstanding of what insurance is. This mindset and lack of what insurance actually is probably also contributes to our utterly absurd health care system, and how we underregulate all forms of insurance. It contributes to people overbuying life insurance, an absolute cash cow for scam artists like Dave Ramsey, and people then underinvest in assets. This helps keep people who don’t understand the system poor while also concentrating the wealth in the hands of the unethical who profit from such mistakes.
So what is insurance?! The primary motive of insurance is to prevent absolute ruin on the occasion of an adverse event. People have lives, and sometimes accidents happen. You need to see a doctor after a climbing accident, you get into a car crash, your house burns down and you lose everything, or your bank goes bankrupt and you need your cash in order to live. These events are unpredictable, they do not happen to everyone, but when they do they can be absolutely devastating. But everyone will have an adverse event happen to them at some point. The problem however is you cannot predict which accident will happen or when to whom. A savings account alone is not enough for such events.
This is where insurance comes in. We all pay into a giant pool of money and when these random events happen the insurance pays out our claim so that we can continue our lives and not suffer for years after an event which we are not at fault for. Insurance helps flatten the curve of spending, so we can better budget for them. On top of this issue, these are events that can happen when you are 30. They can happen when you are 80. Because of that randomness, you cannot simply save your way out of a house fire. Insurance is a necessary part of life. You don’t just need insurance, you need good insurance.
Important side note incoming. Unless you are a professional in the financial services industry, you should absolutely have a trusted personal insurance agent with a fiduciary to you who is not tied to any one particular insurer. I have a degree in economics and some experience in the financial services industry, and I have a personal agent who I have a fiduciary with. I recommend this setup to everyone.
Another vehicle insurance can provide is that it can help an individual negotiate pricing against a powerful monopoly. Health insurance does this because as a group we can negotiate lower prices with drug insurers. The bigger the insurance pool, the lower the price. Single-payer and public option plans save their participants the most money. Health insurance is unique because not only does it negotiate lower prices, but also it protects against a wide array of adverse events. This is why mandatory public health insurance for every individual, or a public option, is a very reasonable policy. Having copays, food standards, and health saving accounts as well can be good policies that lower the risk not just for the individual but society as a whole.
Insurance can become a complicated topic, but these are the basic ideas I learned in my public finance class in college, among a few other classes that touched on the topic. If it is a random, adverse event that can be very expensive, insurance is probably worth it.
Retirement on the other hand is not adverse, and it is not random. It should happen to everyone who lives long enough, and it is possible, and practically easy to plan for. This is why government or private insurance pools are generally successful when it comes to house, fire, property, and health insurance, but insurance is not a viable instrument for retirement. Since it is not insuring against an adverse event, Old Age and Survivors “Insurance” is not actually insurance. It’s a long-expired government handout that transferred money from the Greatest Generation to the Lost Generation. Since then it has been a net loss for every generation since. Properly run insurance is never a net loss outside of a major event like a hurricane.
Please stop calling pensions insurance. They are not insurance.