abstract
This article draws on insurance industry archival materials from 1861 to 1941 to illuminate general life insurance, the primary old-age savings mechanism for American households before the Social Security era.
The paper found:
- General life insurance was a very popular savings vehicle among American families in the late 19th and early 20th centuries. It’s common across all races and socioeconomic classes, and accounts for a large portion of the average household’s savings.
- General life insurance—which pays a lump sum or annuity to the policyholder if he survives to maturity, or to his beneficiaries if the policyholder dies prematurely—is a savings and investment product with several Attractive features, including relatively low risk, reasonable returns, the ability to hedge against economic downturns, and the ability to borrow to smooth consumption.
- The similarities and differences between everyday life policy and social security help explain why the latter eventually replaced the former. A key difference in the policy and allocation impacts is their interaction with inflation, which erodes the value of ordinary life policies (whose returns are set in nominal terms at the beginning of the typically 30-year contract), but Social Security payments, which became more common in the mid-20th century, in part. The rise in peacetime inflation, along with other phenomena discussed in this article, helps explain the shift from voluntary and private means of saving for old age to coercive, nationalized means in the form of social security.
- The common misconception stems from a failure to recognize the popularity and centrality of ordinary life insurance as a savings vehicle for old age in the 19th and early 20th centuries. Far from being unprepared for retirement, most American household heads have seniority savings plans built into their daily policies to cover contingencies such as disability, premature death, and deflationary shocks. The Great Depression did not wipe out their life savings or force them to create Social Security; rather, it was caused by inflation that began during World War II and continues to this day. This fact helps clarify the problem that Social Security was originally trying to solve.
- In sum, the SSA’s original occupational exemption excluded many black families from participation, and the high level of black participation in general life insurance policies that are subject to inflation means that the transition from general life insurance to Social Security is likely to Generating old income differences.
The policy implications of the research findings are:
- The context created by Social Security’s programs can be fully understood by examining the importance of life insurance in general as a retirement savings vehicle before the adoption of Social Security.
- One feature that Social Security is better suited to provide is inflation protection (initially through temporary benefit increases and later through cost-of-living adjustments), because ordinary life insurance develops and thrives during long periods of stable prices.
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