Ordinary Lives: Insurance and Savings in America, 1861 to 1941

This paper uses archival insurance industry data from the period 1861 to 1941 to shed light on ordinary life insurance, which was the primary old-age savings mechanism of American households in the era before Social Security.

The paper found that:

• Ordinary life insurance was a tremendously popular savings vehicle among American households of the late 19th and early 20th centuries.  It was prevalent across races and socioeconomic strata and made up a large fraction of the average household’s savings.
• Ordinary life insurance – which paid lump sums or annuities to policyholders who survived to maturity or paid their beneficiaries if the policyholder died earlier – offered several attractive features as a savings and investment product, among them relatively low risk, reasonable returns, the ability to hedge against downturns, and the ability to borrow to smooth consumption.
• The similarities and differences between ordinary life policies and Social Security help explain why the latter eventually supplanted the former.  One key difference with important policy and distributional implications is their interaction with inflation of the sort that eroded the value of ordinary life policies (whose returns were set in nominal terms at the beginning of an often 30-year contract) but that Social Security payments, which became more common in the mid-20th century, in part account for.  The rise of peacetime inflation, along with other phenomena discussed in the paper, helps explain the transition from a voluntary and private means of old-age savings to a compulsory, nationalized one in the form of Social Security.
• Popular misconceptions stem from a failure to appreciate the popularity and centrality of ordinary life insurance as an old-age savings instrument in the 19th and early 20th centuries.  Far from being unprepared for retirement, most heads of household in the United States had, in their ordinary life policies, an old-age savings plan in place that covered contingencies including disability, early demise, and deflationary shocks.  The Great Depression did not wipe out their life savings and compel the creation of Social Security; rather, the inflation that began during World War II and continues to this day did that.  This fact helps clarify the problem that Social Security initially tried to solve.
• Together, both initial occupational carve-outs in the SSA that excluded many Black households from participation and the high levels of Black participation in inflation-impacted ordinary life insurance policies imply that the transition from ordinary life insurance to Social Security may have produced disparities in old-age savings and in wealth more generally.

The policy implications of the findings are:

• It is useful to have a full understanding of the context in which the Social Security program was created by studying the salience of ordinary life insurance as a retirement savings vehicle in the period leading up to Social Security’s adoption.
• One particular feature that Social Security was better positioned to provide was inflation protection (originally through ad hoc benefit increases and later through the adoption of the cost of living adjustment), as ordinary life insurance was developed and thrived during a long period of stable prices.