The grandfather clause*

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.

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.

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.

“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.

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.

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?

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.

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.

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.

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.

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.

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.

JRoth

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

Why?

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.

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.

“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.