The grandfather clause*

by John Quiggin on November 8, 2011

I saw a reference to (US Representative) Paul Ryan’s plan to kill Social Security and Medicare, but only for people currently under 55 (he doesn’t say “kill” of course, but if it was going to make things better he wouldn’t need to exempt everyone likely to care directly about the issue) and it reminded me to post this.

A policy like this has what economists like to call a time-inconsistency problem. To get the policy approved, Ryan needs the votes of people currently over 55 (hence the exemption) and in the current US situation, any Republican majority has to rely heavily on older voters. Say the plan passes. Sooner or later, the combination of demographics and the electoral pendulum means that the Repubs will be out, and the new primarily majority will face three choices (a) Repeal the whole thing if they can do so before it comes into force (b) Keep on paying high taxes to fund benefits they will never receive for the benefit of the selfish old so-and-so’s who voted to cut the rope once they had reached the top; or© extend the same cuts to the (as of 2011) over 55’s, and claw back some money for themselves.

If I were an over-55 Republican, I don’t think I would want to count on (b)

 

* The original grandfather clause was a Jim Crow rule limiting the franchise to people whose grandparents had held it before the Civil War. The UK adopted something similar in relation to immigration in the 1970s. These examples give some good reasons why grandfather clauses (exempting existing participants in a system from unfavorable rule changes)  are bad policy in general, though there may sometimes be exceptions 

{ 33 comments }

1

jamie 11.08.11 at 5:28 pm

um, paul ryan hasn’t proposed a plan for social security that segregates the over and under 55s. he proposed it for medicare. try again.

2

r. laughlin 11.08.11 at 5:30 pm

hmm, was just looking for you “contact” address with three questions… two of them seem useful here:
Why pay for anything I don’t use?
Why help someone else?

3

Rich Puchalsky 11.08.11 at 5:31 pm

With rare exceptions, economists don’t understand U.S. Social Security. That’s because all of the things that look strange about it are political necessities, not economic ones. It’s designed to be resistant to being done away with.

To quote Luther Gulick quoting FDR (via here:
“In the course of this discussion I raised the question of the ultimate abandonment the pay roll taxes in connection with old age security and unemployment relief in the event of another period of depression. I suggested that it had been a mistake to levy these taxes in the 1930’s when the social security program was orginally adopted. FDR said, “I guess you’re right on the economics. They are politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.”

Almost all of the proposals to modify Social Security, whether hostile in the case of conservatives, or “friendly” in the case of neoliberals, would in fact do away with what has kept the program alive through so many political cycles.

4

Steve LaBonne 11.08.11 at 5:44 pm

The trouble is, if you were an over-55 Republican, you would be stupid and self-centered enough to fall for this trick.

5

kth 11.08.11 at 5:45 pm

Jamie at #1 is correct: Paul Ryan has to date only proposed the evisceration of Medicare. But proposals (such as Bush’s) to gradually privatize Social Security run pell-mell into similar questions; i.e., people who are suddenly responsible only for their own retirement will likely blanch at the transition cost required to pay the benefits for the people who have already retired or are about to.

6

John Quiggin 11.08.11 at 5:50 pm

@Jamie Thanks for the correction. Unfortunately, you were so preoccupied with your gracious phrasing that you made an error of your own. What you meant to write, I’m sure, was

“um, paul ryan hasn’t just proposed a plan for social security that segregates the over and under 55s. he also proposed it for medicare. try again.”

Would you like me to edit your comment for you so it reads as intended?

http://www.roadmap.republicans.budget.house.gov/Issues/Issue/?IssueID=8521

7

MPAVictoria 11.08.11 at 5:54 pm

“The trouble is, if you were an over-55 Republican, you would be stupid and self-centered enough to fall for this trick.”

Exactly what I came here to say but Steve beat me to it. If you are dumb enough to vote Republican you are dumb enough to ignore the obvious consequences of doing so.

8

kth 11.08.11 at 6:01 pm

JQ, I stand corrected, though the fact that Ryan got the all of the House Republicans to vote to destroy Medicare, rather than Social Security, is not completely uninteresting.

9

Henri Vieuxtemps 11.08.11 at 6:12 pm

Well, this sort of thing is pretty common, actually, among various government and international organizations. You joined before year X – you retire at 60, after – at 62. You joined before year Y, you’re paying 6% into the pension fund; after – 8%. Usually people don’t get too upset about it; hey, rules change. I imagine it’s possible to get them agitated, but it would take a deliberate campaign. On the other hand, almost every old geezer is someone’s parent and grandparent, so cutting their benefits would hurt younger people too. So, all things considered, option B doesn’t seem unrealistic.

10

Matthew Ernest 11.08.11 at 6:33 pm

“Offers workers under 55 the option of investing over one third of their current Social Security taxes into personal retirement accounts, similar to the Thrift Savings Plan available to Federal employees. Includes a property right so they can pass on these assets to their heirs, and a guarantee that individuals will not lose a dollar they contribute to their accounts, even after inflation. “

Paul Ryan wants to raise your taxes.

11

chris 11.08.11 at 8:57 pm

Includes a property right so they can pass on these assets to their heirs

This would blow up the whole program (which is probably intentional). The existing benefits are only as generous as they are because of the people who pay in taxes but die before they can collect (or after collecting a below-average amount). If the system had to pay out to people who died young in addition to supporting the ones who live to 85, it would collapse.

But then, Paul Ryan probably won’t be in office by the time the wheels come off, so if it sounds good now, why not propose it?

12

AlexB 11.08.11 at 9:17 pm

“The original grandfather clause was a Jim Crow rule limiting the franchise to people whose grandparents had held it before the Civil War.”

My understanding is that the clauses worked not by explicitly restricting the franchise to those people whose grandparents had held it before the Civil War, but rather by exempting such people from the literacy and property criteria to which others were held as conditions for the franchise. The effect (and intention of the lawmakers) was of course as you describe it.

http://en.wikipedia.org/wiki/Grandfather_clause

13

mpowell 11.08.11 at 9:18 pm

Rich makes the argument that economists don’t understand social security because it’s a political thing rather than an economic one. He is correct that they overlook the political dimension, however…

I make the argument that economists don’t understand social security because they’re idiots (those that don’t, at least). Retirement accounts are really really stupid. Social security is an insurance program not an investment program. As Chris point outs, there are huge benefits to everyone for the fact that if someone dies early, what they would have received is distributed equally to everyone else (and isn’t just a huge windfall to their heirs). This makes providing social insurance much more affordable. Do you really want to pay higher taxes so that your heirs might get lucky financially when you die? Just buy some life insurance then you moron. And to the extent that is in an investment program, it’s an investment in the productive capabilities of the American workforce, ie, the smartest bet for the working population as a whole to make for their retirement plans. The idea that private retirement accounts can ‘grow’ faster than SS can only be held by someone who doesn’t understand the big picture. We can only consume what we produce. The only risk in SS is political. Not a negligible risk, but that’s why we vote for Democrats.

14

Steve LaBonne 11.08.11 at 9:26 pm

Not a negligible risk, but that’s why we vote for Democrats.

Let’s hope those don’t turn out to be very ironic last words…

15

JRoth 11.08.11 at 10:36 pm

These examples give some good reasons why grandfather clauses (exempting existing participants in a system from unfavorable rule changes) are bad policy in general, though there may sometimes be exceptions

Hmm. As an architect, I’m not sure how to respond to this. Modern building codes, rigorously applied to old buildings (and by old, I really mean pre-1970), renders the vast majority of them unusable. I don’t really view that as an acceptable outcome, and so I find “grandfathering” – if this building has always had a restaurant in it, and you’re keeping a restaurant in it, then you don’t need to change everything to bring it up to code (although certain changes have been mandated – you don’t get to cook over an open fire with a hole in the roof) – awfully important for keeping areas with existing buildings at all viable, economically.

On the other hand, this does lead to distortions: I have a current client who wants to open a ~25 seat Thai restaurant in an old pizza shop, but doing so would require her to spend an extra ~$10,000 for new, accessible bathrooms, and so she’s going to put in no more than 10 seats, maintaining its grandfathered takeout status. That’s not ideal for anyone, but I don’t see an alternative that doesn’t involve arbitrary enforcement.

Anyway, it may be that grandfathering buildings has few of the pernicious effects of grandfathering humans. But it seems to me that it’s hard to substantively change systems without some grandfathering-like process. Arguably, a more equitable alternative would involve straight-up redistribution, but that seems pretty infeasible, politically.

16

Emma in Sydney 11.08.11 at 11:08 pm

John, do you think this is only a problem in the US, with its payroll tax funded social security? As I understand it, this has already been done here in Australia, where our old age pension scheme is both means tested and funded from general revenue. For example, someone born in 1952 will be eligible for the pension at the age of 65. Someone born in 1957 will not be eligible until the age of 67. There hasn’t been a tax strike yet, to my knowledge.

17

mpowell 11.08.11 at 11:19 pm

JRoth, I think there is a systematic exception that is appropriate for built physical infrastructure. If we want to upgrade the quality of our infrastructure we realize that we can do it much more cheaply by applying new rules to new infrastructure and in this way cheaply gain advantages in the future that would not be worth the cost to gain today. Of course, even here, if you suddenly realize existing buildings in an earthquake zone are going to fall over if nothing is done, you have to spend the money.

18

Steve LaBonne 11.08.11 at 11:24 pm

Emma, something like that is already the case in the US as well. What JQ is talking about is proposals that are much more extreme.

19

Ebenezer Scrooge 11.08.11 at 11:49 pm

Grandfather clauses are generally unsupportable as a matter of public policy (with some exceptions as noted above.) But public policy is made by politicians, who must trade favors, and tilt toward incumbents. Grandfather clauses, then, often lubricate good future-facing public policy.

20

CharleyCarp 11.09.11 at 3:30 am

People talking about changing eligibility ages don’t understand the Ryan plan. It’s not that people now 53 would have to wait a couple extra years before qualifying. It’s that we could never have the single payer option people just 2 years older will get. Of course it would get changed 12 or so years hence. My guess is that the single payer option for the over 67 set gets cut, rather than extending the single payer option down to people then 65. But no way is that kind of inequality going to be allowed to continue.

21

Emma in Sydney 11.09.11 at 4:42 am

Well, yes, I know it is much more extreme. We already have universal healthcare in Australia, so that part is taken care of, and our age pension system does not rely on contributions, directly, so it’s a different situation. But there are (gradual, incrementally introduced) inequities between different age groups in regard to retirement ages, and it has produced remarkably little in the way of resentment as far as I know. I was wondering what JQ made of it.

22

Sebastian H 11.09.11 at 8:15 am

Isn’t grandfathering almost essential if you need to correct/change long term policy. Take the mortgage exemption (please). The government almost certainly shouldn’t be subsidizing the home mortgage industry with the tax exemption. But if we are ever going to get rid of it, we can’t do so immediately–that would put all sorts of people out of their homes. So we will almost certainly need to phase it out slowly for people who have it now, and phase it out more quickly for people who are buying in the future. That will be classic grandfathering, and it is definitely more fair than not grandfathering.

23

John Quiggin 11.09.11 at 12:03 pm

@Emma: I don’t think a pre-announced change in eligibility age is the same as a grandfather clause.

The big problem with this, much bigger in the US than in Oz, is the class differential in life expectancy. For Australians with non-manual jobs and for the top 20 per cent in the US, an increase in the retirement age is a sensible response to increased life expectancy, along with later entry into the workforce for those with high education.

But that’s much less reasonable for someone who entered the labour force at 15 and has been working at manual jobs ever since. In practice, in Australia, it would usually be possible for such workers to get disability benefit then transition to OAP.

The US situation is even worse because the class differential in life expectancy is growing. IIRC, high school educated workers have not experienced any increase in their conditional life expectancy at 65, so the case for raising the eligibility age does not apply.

24

Barry 11.09.11 at 12:37 pm

Notes and comments:

First, Krugman has covered the ‘increased life expectancy’ question – it’s not that much, and is more for the well-off than for the rest of us (like everything else).

Second, ‘increased life expectancy’ is, of course, not the primary issue; neither is manual laborers having to work more years. IIRC, age discrimination starts (in the US, at least) at age 40, and is total by 50. Almost any worker in the USA who loses a job after age 40 is dropped to the bottom of the labor market, with obvious consequences.

Third, John Q is missing the screaming elephant which is currently on fire in the living room. *Of course* there will be resentment. The GOP lives off of it, and nurtures it. If there is a sharp and obvious break between those (say) above and below age 55, the next step will be the classic GOP line ‘why should they have it when you don’t?’. This would put strong destructive pressure on the system. A feature, not a bug.

Fourth, I disagree with Rich – the reason most economists have problems dealing with Social Security is that the economics profession, taken as a whole, is evil. They see government money going to somebody not rich, and throw a sh*t fit. Government money going to the rich is also, in theory, bad, but that can be taken care of later[1], after the non-elites have been broken.

Finally, mpowell cut to the point – the GOP is a uniquely destructive looting force in the USA; I believe that it’s the exception elsewhere in the civilized world. The best analogy for the USA is a person with a severe parasitic infection. Their health is generally reduced, and they’ll have frequent crises.

[1] In this usage, ‘later’ is similar to the ‘later’, when that state withered away, and socialism turned into True Communism – namely, never.

25

Matt McIrvin 11.09.11 at 1:45 pm

Yeah, having to work until I die isn’t the thing I’m mainly worried about; it’s having to work but not being able to get a job. My work is not physically demanding, I enjoy it a great deal, and I’d happily do it into my nominal retirement years, barring some sort of infirmity that makes it impossible. But in a world like the one we have today, it’s going to be harder and harder to get hired once I turn 50, especially if the overall market is contracting. In many “knowledge worker” professions, the assumption is that you’re going to somehow climb the ladder of status (whether as manager or as revered elder expert) or wash out, but there aren’t so many slots at the top. It all has the effect of squeezing out older workers, and there’s this gap opening up until the time when you can actually qualify for retirement benefits.

Right now, the group encountering the most economic grief are young people right out of school. But I think this is going to be a big issue over the next couple of decades, as the libertarian-leaning GenX types who made the tech boom of the 1990s get older and end up on the wrong end of this.

26

Rich Puchalsky 11.09.11 at 2:01 pm

“the GOP is a uniquely destructive looting force in the USA”

It’s the conservative party in a declining world empire… I mean, what do you expect.

27

reason 11.09.11 at 2:14 pm

JRoth

“Arguably, a more equitable alternative would involve straight-up redistribution, but that seems pretty infeasible, politically.”

Why?

28

reason 11.09.11 at 2:18 pm

JRoth – I really don’t see what you mean here. Why is straight redistribution less politically feasible than say the ditching of social security? Aren’t people becoming increasing aware that virtually all the gains of the last 30 years have gone to the top 1%. I wouldn’t have thought, knowing that, that straight redistribution wasn’t such a hard sell. 99% is a much larger number than 1% and majorities count.

29

bert 11.09.11 at 5:08 pm

John, I just followed a link from Krugman to your Times OpEd.
Is there a reason you’re not trailing it on CT?
My only criticism is that you underplay the role of Germany. As a result you don’t trace the obsession with sound money back beyond the 70′s, or show that the design of the ECB mirrored that of the Bundesbank. But that’s a what-about criticism, and should be taken as such. They gave you a wordcount. You’ve made good use of it.

30

Mike from Ottawa 11.09.11 at 8:02 pm

” IIRC, high school educated workers have not experienced any increase in their conditional life expectancy at 65, so the case for raising the eligibility age does not apply.”

Krugman put it pithily that ‘Janitors will have to work longer because bankers are living longer.’ E&OE

31

Barry 11.10.11 at 12:39 am

MAtt McIrvin: “But I think this is going to be a big issue over the next couple of decades, as the libertarian-leaning GenX types who made the tech boom of the 1990s get older and end up on the wrong end of this.

Not really, they’ll just learn, as each cohort has before, that what looks good when you’re in your 20′s, unencumbered, ignorant and temporarily well-placed, doesn’t look good as things change.

32

Bloix 11.10.11 at 11:05 pm

#25 – my big fear is outliving my money. I’m in my mid-fifties and I expect that when I get to be 65 I’ll have enough to live on until I’m 85. I have no pension, only a 401(k). So what I do I do? Do I need to work until I’m 70 to deal with the risk that I might live to be 90? At least social security allows me to make a retirement decision that doesn’t lead me to conclude that I have to work til I’m 80 in order to protect against the risk that I’ll live to be 100.
The great advantage of social insurance is that you get money as long as you live and you don’t when you die. No fear that you might not be fortunate enough to die soon. No guilt that each year you live means less for you to pass on to your children. And no pressure on the elderly to save more than they need to live on, which reduces consumer spending and is therefore contactionary.

The Ryan plan seems intentionally designed to get rid of all the insurance-related benefits of social security – make it individual, so there’s no risk-spreading and therefore creates pressure on retirees to over-save, and allow it to go to heirs, so elderly people can feel bad about spending their money and their children can resent them for not dying.

33

David Carlton 11.14.11 at 2:04 pm

“The original grandfather clause was a Jim Crow rule limiting the franchise to people whose grandparents had held it before the Civil War.”

Actually, no. Sorry to pick a nit, but the grandfather clause was a means of preventing disfranchising measures such as literacy tests and property requirements from disfranchising those whose ancestors had been able to vote before blacks were given the vote during Reconstruction. It wasn’t a limitation, it was an exemption–just as grandfathering in us 55+ codgers is.

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