Insurance and Savings in America, 1861 to 1941 – Center for Retirement Research

Abstract

This paper uses archival insurance industry data from the period 1861 to 1941 to shed light on standard life insurance, which was the primary means of saving for the elderly for American families in the pre-Social Security era.

The paper found that:

• Standard life insurance was the most popular savings vehicle among American families in the late 19th and early 20th centuries. It was prevalent across all ethnicities and socio-economic classes and accounted for a large proportion of average household savings.
• Traditional life insurance – which pays lump sums or annuities to policyholders who survive to maturity or pays out to their beneficiaries in the event of the policyholder’s early death – offers several attractive features as a savings and investment product, among them relatively low risk, reasonable returns, and the ability to hedge against drawdowns , and the ability to borrow for good use.
• The similarities and differences between general health policies and Social Security help explain why the latter took first place. One important difference with important policy and distributional implications is its interaction with inflation of the kind that destroyed the value of ordinary life policies (whose returns were set at the beginning of the 30-year contract that often appeared) but Social Security payments, which became common during the 20th century, in part narrates. Peacetime inflation, along with other phenomena discussed in the paper, help explain the transition from a voluntary and private system of saving for the elderly to a compulsory, nationalized one in the form of social security.
• A popular misconception stems from a failure to appreciate the popularity and centrality of standard life insurance as a savings tool for the elderly in the 19th and early 20th centuries. Rather than being unprepared for retirement, most heads of households in the United States, in their normal life processes, had a retirement savings plan that covered contingencies including disability, premature death, and inflationary shocks. The Great Depression didn’t wipe out their life savings and force the creation of Social Security; rather, the inflation that began during World War II and continues to this day did just that. This fact helps explain the problem that Social Security originally tried to solve.
• Together, both the initial job carve-outs in SSA that excluded many Black families from participation and the high levels of Black participation in conventional life insurance policies that contribute to inflation suggest that the transition from conventional life insurance to Social Security may have produced disparities in the past. – saving years and wealth in general.

The policy implications of the findings are:

• It is helpful to fully understand the context in which the Social Security system was created by learning about the importance of standard life insurance as a retirement savings vehicle during the period leading up to the receipt of Social Security.
• One factor Social Security was in a better position to provide was inflation protection (first through short-term benefit increases and later through the acceptance of life adjustment costs), as standard life insurance developed and flourished during long periods of stable prices.