The Economics of Social Protection, by Lars Söderström

Edward Elgar, 2008, xi + 180, pp, hbk 1 847 202390, £49.95

Söderström understands social protection as provision for consumption needs when for various reasons (unemployment, illness, childhood, old age) we cannot provide for them ourselves. A pooling of resources is required, in the shorter term enabling those in need to benefit, and in the longer term enabling all of us to benefit during those periods of our lives during which our productive capacities or opportunities don’t match our consumption needs.

In chapter 1 the author discusses a variety of agents of social protection: families, banks, insurance companies, mutual societies, and the State; he explores problems relating to insurance provision (exclusion of those with risks too high to enable them to pay premiums, and adverse selection caused by asymmetric information) and also problems relating to charity (free riding); and he identifies government use of tax revenues as legitimate and necessary as an additional means of providing social protection.

Chapter 2 understands inequality as reflecting differences in choice as well as in opportunities, as the result of previous choices, and as the result of chance; chapter 3 discusses three understandings of social justice, and helpfully relates them to the different elements of inequality (p.50); chapter 4 discusses private pension arrangements and proposes an alternative to insurance provision: the purchase of interest-bearing bonds; chapter 5 compares Pay As You Go schemes with Capital Reserve (i.e., fully funded) schemes; chapter 6 uses simulations and a lifecycle model to study how mandatory pensions affect aggregate saving (and there is an interestingly topical study of student loans); chapter 7 discusses income security during working life (a combination of family, market and state provision is found to be essential); and chapter 8 looks at benefits in kind (for instance, public subsidisation of health care).

This book will be of interest to anyone interested in the technical detail of funding mechanisms, and those not so inclined will still find plenty of thought-provoking material to explore; but there are one or two basic assumptions which readers might wish to question. For instance: Söderström treats children as consumption choices made by adults (and, significantly, when discussing life phases in the context of pension provision he decides to reduce the life phases from four to three by omitting childhood (p.61)). This understanding of childhood, and the related concentration on pension provision, compromises the stated lifecycle approach of the book. Similarly: the cluster of income maintenance mechanisms is reduced to three: insurance, family, and state, with state provision restricted to filling gaps left by the other two. There is little sense that other patterns might be Pareto optimal, have low administrative costs, and be conducive to social justice. (In general, too little account is taken of administrative costs: an important frictional element in any social protection provision.)

This book is a treasure-trove of empirical data, theoretical discussion, and practical application, and also as a useful indicator of how much of Europe understands social protection.