Home > Economics - General > The grandfather clause*

The grandfather clause*

November 9th, 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 (c) 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 

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  1. critical tinkerer
    November 9th, 2011 at 05:15 | #1

    JQ, you are wrong about having options by the time Repubs will be out. IF such law is implemented those not exempted would stop paying into SS immediately which is about half of payers, and considering recent studies where younger employees are having smaller incomes then older that would make it a third of payments into SS less. But as boomers are going into retirement that deficit in payments would accelerate compoundedly and SS would be depleted within 5 years.
    Now, whether the payment into IRAs for non-exempt is mandatory or not, if not then you can expect economic boom for few short years until the SS goes bust and then total social and economic crash. If it’s mandatory then there would be no effect on economy until SS goes bust and takes economy with it. There will be no options once SS goes bust and that is within 5 years.
    By implementing such law, Repubs will go out at the next election which would be 2014 and only way to save SS after 2 years of such depletion would be to remove the rule that SS can not produce federal deficit and then raise the taxes. But Repubs can implement such law only with Repubs president (2012-2016) which would not sign to raise taxes, so it would be necessary to have 2/3 of congress to vote so. Nothing possible to do about it until 2016, by then the SS is kaput and the USA with it.

  2. Ernestine Gross
    November 9th, 2011 at 07:06 | #2

    JQ, it seems to me grandfathering clauses are ‘bad’ iif they are introduced for party political (vote buying) reasons but they are ‘good’ if they are introduced for life cycle equity reasons.

  3. Ikonoclast
    November 9th, 2011 at 09:48 | #3

    The USA will “kill itself” if it continues to pursue this raft of right wing delusional policies. The pragmatic Chinese leadership must have a good laugh at their meetings. “No need to confront the USA, they are doing such a good job of destroying themselves.”

  4. TerjeP
    November 9th, 2011 at 12:28 | #4

    Anybody born in Australia after about 1970 will have had compulsory superannuation nearly all their working life by the time they reach retirement age. That coupled with increased life expectancy means we should be ratcheting up the eligibility age for the aged pension. However not grandfathering this would probably be quite politically difficult. Note that the ALP have started this process and something similar is LDP policy.

  5. Peter Whiteford
    November 9th, 2011 at 14:13 | #5

    The age pension age has already risen for women and will also rise for both men and women to 67 between 2017 and 2023. Also because we income test the age pension, rising superannuation will automatically reduce age pension spending.

  6. Fran Barlow
    November 9th, 2011 at 14:25 | #6

    While what you describe here PrQ seems to be crass opportunism there can be sound grounds for time-specific application. Progressively raising the age at which someone becomes elegible for the aged pension (and likewise the means and asset test provision) seems like something that one would want to do in conjunction with changes in superannuation or other retirement provision, which in turn implies a fairly long lead time or a fairly slow and incremental approach. People are entitled to have a reasonable amount of certainty so that they can plan for retirement without that certainty becoming an obstacle to more equitable provision.

  7. TerjeP
    November 9th, 2011 at 20:53 | #7

    @Peter Whiteford

    A good fist step but we should be raising it beyond 67.

  8. critical tinkerer
    November 10th, 2011 at 00:28 | #8

    Newer studies show that since Reagan changed the SS and retirement age, there was no change in lifespan of lower class. Only well-off have the extended lifespan. Rising retirement age indiscriminately will benefit already well off on expense of not well off.
    I am for extending retirement age of office workers only, especially in public sector, but considering lowering retirement age of physically demanding employment, depending on percentage of such employment throughout work life.

  9. Ikonoclast
    November 10th, 2011 at 11:46 | #9

    @TerjeP

    A day in the life of TerjeP’s perfect world.

    “This is the evening news. Today the government raised the retirement age to 100. In other news, taxes were reduced again and will now only fund police, courts, military, judiciary and the DHCS (Dead Homeless Clean-up Squad). Residents on Billionaires Row, Toorak Melbourne, all three of them, have been given permission to use private security conctractors with heavy calibre weapons to keep the hordes of hungry away from the electrfied perimeter fences of the estates.

    In environmental news, loggers in the Amazon cut down the last known rainforest tree in the world on the ice in Greenland continues retreat at 10 meters a day on all major glacial fronts.

    The weather today in Sydney will be green skies with CO2 levels at 1,500 ppm equivalent. Winter temperatures will hit 35 C again, Water and electricity shortages will affect most suburbs without privatised supplies.

    Prime Minister TerjeP says “Remember to enjoy your day.” When asked about the green sky pollution he said “I love the smell of freedom in the morning.”

  10. TerjeP
    November 10th, 2011 at 12:55 | #10

    Partly correct. Except for the following.

    Next to nobody would be hungry. We would likely have a nuclear energy sector and little in the way of CO2 emissions. And the Amazon would not be government owned and open for plunder. Nor would the Amazon be privatised on the current basis where you must clear it before you can own it. However taxes would be low and firms offering private police services would be allowed to operate.

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

  11. TerjeP
    November 10th, 2011 at 12:56 | #11

    p.s. I take it that you have never visited a low tax nation such as Singapore or Hong Kong?

  12. may
    November 10th, 2011 at 13:12 | #12

    @Ikonoclast

    you forgot the front page of the new rogerailes clone opinion-for-proles paper reporting the dignified and elegant auction* for the last tin of caviar.

    *
    monies raised for charitable cause of “the poor heiress latest handbag fund”

  13. Dan
    November 10th, 2011 at 13:31 | #13

    TerjeP@11 – those beacons of common sense and decency.

    I for one am happy to work (non-physical labour) until 67 or 70, especially if incentivised to do so. No biggie. Don’t know why people get so riled up about that particular issue.

  14. Ernestine Gross
    November 10th, 2011 at 13:59 | #14

    Singapore and Hong Kong: “low tax nations”.

    What is your concept of “a nation”, Terje P? Would it include self-sufficiency in food, for example? Or would it be something like Westfield corporation? Nestle?

  15. Ikonoclast
    November 10th, 2011 at 17:21 | #15

    @Ernestine Gross

    Yes, I think I have previously debunked the low-tax “nation” status of Hong Kong and Singapore. They are unrepresentative city states which are air and shipping hubs. Some small states can derive all or much of state revenue from being transport hubs, gambling venues or oil producers. It is not valid in any statistical or logical sense to compare the tax regimes of these special case city states to those of standard extensive nation states. It is TerjeP once again cherry picking oranges and comparing them to apples.

  16. TerjeP
    November 10th, 2011 at 17:34 | #16

    Britian has not been self sufficient in food for over a century but most of us would regard Britain as being a nation. I don’t think self sufficiency in food is at all relevant.

  17. TerjeP
    November 10th, 2011 at 17:40 | #17

    Westfield corporation is not a nation. It lacks the capacity to make and enforce laws for any meaningful jurisdiction. If you murder somebody in a Westfield shopping centre they may detain you but they don’t claim any authority to put you on trial and imprison you. Nor are they independent of laws made by entities that we do recognise to be nations.

  18. Ernestine Gross
    November 10th, 2011 at 17:40 | #18

    @TerjeP
    What is your concept of”a nation”, TerjeP?

  19. TerjeP
    November 10th, 2011 at 17:49 | #19

    @Ernestine Gross

    A territory with an autonomous government.

  20. plaasmatron
    November 10th, 2011 at 19:38 | #20

    I’ve been to both Singapore and Hong Kong and they are the most boring nations I have set foot in, especially Singapore. Nothing for the average bloke to do but work.

  21. paul of albury
    November 10th, 2011 at 19:52 | #21

    Singapore is hardly the place most associated with personal freedoms either. Funny place for a libertarian to suggest we model ourselves on. I guess low taxes trump civil liberty.
    And neither Hong Kong nor Singapore are anything close to sustainable – not where you’d want to be in an environmental catastrophe.

  22. conrad
    November 10th, 2011 at 19:53 | #22

    “I’ve been to both Singapore and Hong Kong and they are the most boring nations I have set foot in”

    I think places are as boring as you make them. I lived in HK for a number of years, and had super time. However, somehow I doubt that really had a lot to do with the tax rate — although it probably does have something to do with no minimum wage, which means lots of tiny little businesses can survive that wouldn’t in Aus.

    Back to the topic of the post, one thing that has been grandfathered without too much fuss in Aus are university fees. Many of us born within certain age ranges had either free or very cheap education and the introduction of now much higher fees didn’t and still doesn’t seem to generate too much fuss.

  23. TerjeP
    November 10th, 2011 at 20:20 | #23

    @plaasmatron

    Can you testify to the high rate of starvation and the electricfied perimeter fences.

  24. Freelander
    November 10th, 2011 at 21:06 | #24

    @paul of albury

    The libertarian I think I will model myself after is Genghis Khan. Now there was someone who really appreciated the value of freedom.

  25. Ikonoclast
    November 11th, 2011 at 07:25 | #25

    @conrad

    The introduction and continuance of university fees is a disgrace. It is a clear example, to use Prof J.Q’s phrase, of “the selfish old so-and-so’s who voted to cut the rope once they had reached the top”.

    My generation received a free tertiary education. Apparently, in those non-privatised days, “inefficient” Australia with significant levels of public enterprise could afford free free tertiary education. Now an “efficient” and more privatised Australia cannot afford free tertiary education. Isn’t this a bizarre outcome?

    The Raison d’être of free tertiary education was and is human equity and the ensuing social benefit. If there are no major financial barriers to tertiary education then entry can be based on intellectual merit, not wealth, and the nation will benefit from training the majority of the best minds rather wasting many.

    The most expensive “product” of our society is the human being. Neoliberal “rationalisation” and marketisation of all aspects of society has resulted in persistent high unemployment and under-employment. Properly calculated, the financial and human cost of wasting youth in enemployment must be enormous. The push is to park some of these numbers in token “tertiary” training to hide real youth unemployment levels. Part of the pressure for university fees has come from this cause. One might also add that the pressure to lower intellectual standards in universities has also come from the fee-paying business model. Certainly, placing managerialists in charge of universities has lowered the intellectual level in administration.

    When our economy collapses into prolonged depression, as it most assuredly will if neoliberal economic prescriptions continue to prevail here and abroad, the possibility of these HECs debts being repaid will vanish as the current cohorts will find no employment.

  26. may
    November 11th, 2011 at 12:41 | #26

    @Ikonoclast

    this education qustion is something i have been wondering about for ages.

    in Australia.

    when the ability to obtain higher education occurred,heaps of people who would not have been able to obtain qualifications and skills did so.

    these people took those qualifications and skills into the market and productivity consequently rose more than it would have without their contribution.

    how much was that contribution worth to the nation compared to the cost of facilitating it?

    i spose the accounting would be not easy to quantify.

  27. may
    November 11th, 2011 at 12:42 | #27

    the time i mean is from 1972.

  28. Dan
    November 11th, 2011 at 13:06 | #28

    Ikonoclast: my parents got free university education (C’wealth scholarships, just a little pre-Whitlam) but I did not. I actually think the system that we have now is about right.

    The reason is that higher education is analogous to an arms race: the benefits are diminishing (now a lot of fairly dumb jobs expect postgrad quals) but the costs of this process are socialised.

    In any event, university for Australian citizens is so cheap in the scheme of things and HECS such a progressive and forgiving system that anyone who seriously thirsts for knowledge but subsequent to their degree wants to spend their life working in a bookshop is entirely able to do so. And that’s leaving aside the increasingly vocational (as opposed than liberal) nature of much university education, which partially renders this paragraph moot :P

  29. TerjeP
    November 11th, 2011 at 18:26 | #29

    @Ikonoclast

    I paid for my higher education via HECS. I don’t want to pay for the higher education of the next generation.

  30. Ikonoclast
    November 11th, 2011 at 19:27 | #30

    TerjeP :
    @Ikonoclast
    I paid for my higher education via HECS. I don’t want to pay for the higher education of the next generation.

    As usual, TerjeP replies with no substantive points. We simply learn the fact that TerjeP paid (not even the true cost) for his education and this emotionally predisposes him to not pay for the education of others. No other analysis is necessary apparently.

    I’ve finally learnt the real meaning of a free market to libertarians. It saves them from thinking; no need to think out anything as the market will automatically handle everything correctly.

  31. Tom
    November 11th, 2011 at 20:43 | #31

    Paying for teritary education is about right, as universities can use their income to invest in education equipments. However, with that being said an education system that cost too much will be bad as well. If I really need to point out an example it would be the US, their university costs about as much as ours (excluding big brands like Harvard), but their median wage level is much too low compare to Australia which had discouraged a lot of youths from studying teritary education. This would be the reason why so many of the capitalist claiming that the lower/middle income earners pays are low is due to low educated workforce (which I don’t believe is the case). Situations like these is extremely bad for the future society as the US population gets more and more pessimistic as days go by about the future state of their economy they will forgo teritary education as they see no hope in repaying their debt. This will virtually create a poverty trap and a low educated future workforce (maybe thats what the capitalist likes to see so they can officially pay them low wage?).

  32. Freelander
    November 11th, 2011 at 21:19 | #32

    @TerjeP

    You do recognise that HECS does not pay the full cost of your education?

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