Home > World Events > The grandfather clause (repost)

The grandfather clause (repost)

August 12th, 2012

With the announcement of the Romney-Ryan ticket, I decided to repost this piece on the most striking (to me) aspect of Ryan’s plans, namely the exemption of those currently over 55 (or maybe those who were over 55 in 2010 or 2011, when the plan was first announced. If everything goes to plan for the Repubs, Ryan would be the presumptive candidate after Romney’s second term in 2020. Coincidentally or not, that’s just about the point when the exemption runs out. People retiring after that will have spent a decade or more paying taxes to support benefits for those grandfathered in, but won’t be eligible themselves.

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 younger 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. TerjeP
    August 12th, 2012 at 11:08 | #1

    Surely there is an alternate explanation besides the political one about gathering votes. And that is that whilst it is recognised that the system is unaffordable long term it is also recognised that some people are too close to the end of their working career to make alternate arrangements. On the flip side people won’t start to make alternate arrangements until they see the system is changed. So even leaving aside the political angle there are policy reasons why you might change course in this sort of way.

  2. Freelander
    August 12th, 2012 at 11:53 | #2

    Good point. 55 is a bit late to suddenly start saving to make up for what you were depending on.

  3. Katz
    August 12th, 2012 at 12:53 | #3

    It’ll be entertaining to watch middle-aged Republican dimwits struggling to reconcile prejudice and fear.

  4. Freelander
    August 12th, 2012 at 13:04 | #4

    With the escalation of extreme weather events’ record breaking and the increasing domestic disruption due to climate change, the struggle between fear and self-preservation on the one hand, and the reluctance to admit ever having been totally wrong on the topic is another struggle we may watch played out over the next few years.

  5. Freelander
    August 12th, 2012 at 13:15 | #5

    US domestic disruption that is… Here we seem to have moved into an eternal rain cycle, as Gaia attempts to lose heat.

  6. BilB
    August 12th, 2012 at 13:24 | #6

    Terje,

    What does

    “people won’t start to make alternate arrangements until they see the system is changed”

    mean for low income families? buy a burial plot for their early demise while they can still afford it??

    What are all of these “captains of industry” doing? the ones who claim to be so effective that they should be paid tens of millions of dollars a year. Where is the economic power that made America great?

    It seems to me that Ryan has proposed a protective fence be put around the baby boomers to let them slide comportably off into history,….and to hell with the rest of America.

    It is a very Libertarian ideal. You would be so proud if they did that here.

    Seperately, did anyone else see “The History of Scotland” programme the other night? Wow it explains so much about Brittain, and America.

  7. Jim Rose
    August 12th, 2012 at 15:06 | #7

    The problem with savings for retirement systems is that there is a shortage of good savings opportunities given most current tax systems and governments breaking their promises

    Eliminating taxes on income from capital will greatly increase saving opportunities and make a savings-for-retirement systems feasible. The capital-output ratio is higher.

    • The increase in the market value of business equity permits the financing of retirement consumption through savings. There is no need for need to tax workers’ labor income to finance transfers to retirees.

    • The Australian superannuation system already lightly taxes income from capital. this mandatory retirement saving system is socially desirable because it solves the problem of people intentionally free riding and becoming a welfare burden.

    Rawls opposed income taxes. He advocated progressive consumption taxes. These tax what people take out of the common store of goods rather than what they contribute.

    As for democratic trends, notions of identity and political affiliations and parties can change dramatically. It is assumed that minorities will continue to identify as minorities.

    The GOP is courting Latinos on the basis of shared social and religious convictions—opposition to abortion and same-sex marriage and a commitment to family values.

    Consider the 19th and early 20th century mass immigration from Southern and Eastern Europe:
    • Initially outsiders, they aligned with the political party that most identified with their concerns in the fourth party system between 1896 and 1932.
    • As these Southern and Eastern European migrants rose out of the working-class and joined the middle class, they assimilated fully into American life.
    • Their political preferences were now those of whites —less dependent on their racial or ethnic traits than on factors like education, wealth, and geography.

    The fourth party system between 1896 and 1932 was a one and a half- party system where black Americans voted as a bloc for the party of Lincoln. The Democrats were a fiery brew of protestant Southerners and urban Catholics. The Republicans scooped up the rest.

    The republicans lost the white house in the fourth party system once between 1896 and 1932 only when its left-wing, which was to the Left of the Democrats, formed the progressive party under Teddy Roosevelt in 1912.

    HT: http://prospect.org/article/democrats-demographic-dreams

    p.s. a grandfather clause is another name for no retrospective legislation and no ex-post-facto laws. No ex post facto laws are central to the rule of law and many human rights conventions. Retrospective legislation destroys the certainty of law, is arbitrary and is usually vindictive. The cost-benefit ratios of many building and safety codes would change to negative if they did not have grandfather clauses.

  8. Freelander
    August 12th, 2012 at 17:04 | #8

    Sounds like you have a magic system there for solving the problem, and that is not meant in a good way.

  9. Freelander
    August 12th, 2012 at 17:27 | #9

    Nonsense that a grandfather clause is simply no retrospective law.

  10. BilB
    August 12th, 2012 at 17:49 | #10

    Way off track but relevent in that everything that we take for granted is certain to change, every one should read this article from Robert Rapier’s blog via TOD

    http://www.theoildrum.com/node/9386

    We smugly assume that our way of life will continue indefinitely. We’ve got 10 years, 20 years tops.

  11. Ikonoclast
    August 12th, 2012 at 19:06 | #11

    Everything will magically resolve itself provided we invent the zero tax economy, perpetual motion and the free energy machine. ;)

    Speaking seriously, the US is in such bad trouble it is hard to see how they have any way out of it. Grandfathering (bad policy as it is) is almost the least of their troubles. Leaving out resource and envirionmental collapse (which will be common to the whole world in the long run), the US is in severe trouble because of;

    Maladapative Ideology and Myths;
    Oligarchic rule;
    Imperial over-reach;
    Military Overspending;
    Growing Wealth Inequality;
    Criminalisation of poverty;
    Decaying social cohesion;
    Decaying infrastructure;
    Decaying education system;
    Offshoring of manufacturing;
    Dominance of FIRE (Finance, Insurance, Real Estate) sector.

    We see all of this playing out at the political and “intellectual” level in the US in the cultural bias for sophism and rhetoric over logic and empiricism.

    The overall meme of modern US culture is denialism.

  12. Freelander
    August 12th, 2012 at 19:18 | #12

    The US made the world a far better place than it otherwise would have been through efforts to rebuild Europe and Japan just after the war. Hope for that standard of vision from any of the current crop, especially with their current electorate, seems forlorn.

  13. August 12th, 2012 at 20:37 | #13

    Freelander :
    Good point. 55 is a bit late to suddenly start saving to make up for what you were depending on.

    At the risk of blowing my own trumpet, this issue and the ones JQ raises are among those I was addressing in my submission to the Henry Tax Review for the Retirement Income System, which I posted here on JQ’s blog for comment (there’s more reasoning on it here). This approach – not simply cutting off the system for people born after a certain date but instead letting people into it later and later – avoids facing people with that abrupt problem. It also doesn’t give rise to the awkward options JQ outlined as coming up later, by having an ever larger group of people not paying for the diminishing system. You can see that I have been mulling this over for many years.

  14. Ernestine Gross
    August 13th, 2012 at 11:06 | #14

    JQ, I fully concur with your argument regarding the particular grandfathering clause example and I can see why it is characterised as a time-inconsistency problem.

    It seems to me it is not grandfathering per se but bias that is the problem. In the absense of any other information, the particular grandfathering clause example entails a wealth redistribution bias against the younger cohorts.

    Similarly a land tax in Australia would be biased against cohorts now 60 years or older because they used to pay higher income and other taxes when they were young.

  15. BilB
    August 13th, 2012 at 11:59 | #15

    EG,

    I think that you really need to contemplate this statement

    “because they used to pay higher income and other taxes when they were young”

    This is a statement that assumes a steady state population and economic environment.

    The fact is that the population has more than doubled since “these people” were young, and so many economic factors bear absolutley no resemblence today to what they were “then”.

    (spoiler alert for anyone under 65)

    The syndrome here is that we tend to think of our economy as we do about our self. Within our selves we spend some 40 years being 21. It is only when the evidence of ageing (or disability) overcomes us that we begin to change our self perception.

    The reality is that not only has our global economy aged dramatically in the last 40 years, so has our global environment, and our global resource map.

  16. Tom
    August 13th, 2012 at 12:35 | #16

    @Ernestine Gross

    No economist with the right mind will have bias free as an objective of economic theory or policies. Such moral ideology ignores the reality of how any economic systems works (that includes capitalist or mixed economy), one of the essential is that inequality must exist.

    If economic policies should aim for bias free, it would mean that for example, income tax should be flat and applied to all sources of income. Most if not all Keynesian oppose flat tax rate and neoclassical right (most have libertarian mindset) oppose capital gains tax. Also bias free policy system can never be achieve even in a egalitarian society because it would be ignore some of the natural disadvantaged such as people with disability or mental illness etc.

    Although I don’t believe in bias in policies will create economic problems, I do agree it will create political problems.

  17. Ernestine Gross
    August 13th, 2012 at 16:50 | #17

    BilB, I don’t agree my comment implies a steady state population.

    Tom, I did not say that ‘bias free’ is an objective per se. I said, “In the absense of other information, the particular grandfathering clause example entails a wealth redistribution bias against the younger cohorts.”

    Suppose there is a society which, for reasons you or I may not understand, does not want social security or medicare. Suppose further that at present many members of this society depend on social security and medicare. Suppose further that in addition to the grandfathering clause described in the thread there is an announcement that another policy (‘siblingfathering’) is to be introduced, namely, all individuals will receive enough income in the future such that they can afford a ‘decent living’ including medical services and enough to be able to save for their retirement or pay for insurance. I am not saying this would be ‘good’ policy. I am merely saying the problem with the grandfathering clause, described in the thread would look very different.

    You say: “Although I don’t believe in bias in policies will create economic problems, I do agree it will create political problems.” Well, I beg to differ strongly. I would suggest a careful reading of JQ’s book ‘Zombie Economics’ reveals a sequence of policy changes that are consistently biased in favour of a small set of people who have institutional power (unions, politicians, CEOs, bankers) at the expense of the proverbial 99%. The result: GFC.

  18. Ernestine Gross
    August 13th, 2012 at 17:08 | #18

    BilB, I don’t agree my comment implies a steady state population.

    Tom, I did not say that ‘bias free’ is an objective per se. I said, “In the absense of other information, the particular grandfathering clause example entails a wealth redistribution bias against the younger cohorts.”

    Suppose there is a society which, for reasons you or I may not understand, does not want social security or medicare. Suppose further that at present many members of this society depend on social security and medicare. Suppose further that in addition to the grandfathering clause described in the thread there is an announcement that another policy (‘siblingfathering’) is to be introduced, namely, all individuals will receive enough income in the future such that they can afford a ‘decent living’ including medical services and enough to be able to save for their retirement or pay for insurance. I am not saying this would be ‘good’ policy. I am merely saying the problem with the grandfathering clause, described in the thread would look very different.

    You say: “Although I don’t believe in bias in policies will create economic problems, I do agree it will create political problems.” Well, I beg to differ strongly. I would suggest a careful reading of JQ’s book ‘Zombie Economics’ reveals a sequence of policy changes that are consistently biased in favour of a small set of people who have institutional power (union bosses, politicians, CEOs or corporations, bankers) at the expense of the proverbial 99%. The result: GFC.

    It seems to me you have overlooked my agreement with JQ’s argument.

  19. Tom
    August 13th, 2012 at 18:22 | #19

    @Ernestine Gross

    “Well, I beg to differ strongly. I would suggest a careful reading of JQ’s book ‘Zombie Economics’ reveals a sequence of policy changes that are consistently biased in favour of a small set of people who have institutional power (union bosses, politicians, CEOs or corporations, bankers) at the expense of the proverbial 99%. The result: GFC.”

    Fully agreed and thanks for pointing out my careless comment. It was my fault to misrepresent myself, however I hope to explain my original intention of the statement.

    My intention was about policies such as land tax which the revenue can be used as a transfer from the relatively well off to the relatively worse off. I believe such a bias do not cause economic problems in current Australia’s situation. This bias towards certain group of the economy can also be found on stimulus as well, as most stimulus package have larger benefits to the lower income quintile (as % of income) than the higher income quintile which usually comes with diminishing nominal amount of cash handout, or no benefits at all (indirect benefits are not dismissed for simplicity).

  20. Tom
    August 13th, 2012 at 18:24 | #20

    Corrections: “indirect benefits are not dismissed for simplicity”

    should be “indirect benefits are dismissed for simplicity”

    ……… looks like I’m still sleeping……

  21. Jim Rose
    August 13th, 2012 at 18:43 | #21

    Every day spent campaigning against Paul Ryan is a day wasted not campaigning against Mitt.
    • 43% of Americans report that they have never heard of Paul Ryan.

    • In mid-July, 52% could not even make a guess as to whether Ryan was a member of the House, the Senate, was Secretary of State, or was a Governor

  22. Freelander
    August 13th, 2012 at 19:56 | #22

    Interesting. And here was I thinking Romney and Ryan were on the same ticket?

  23. Ernestine Gross
    August 13th, 2012 at 21:33 | #23

    @Tom

    May I suggest a wealth tax instead of a land tax for wealth redistribution purposes? Surely there is enough solid theoretical knowledge (eg post 1950s general equilibrium models which contain a strong assumption on wealth distribution) and empirical results (‘Wirtschaftswunder’, other ‘economic miricles’, Brasil, ….GFC….) to engender confidence in economists to argue for a fairer (less unequal) income and wealth distribution within large organisations, within countries and across countries without punishing specific age cohorts.

  24. Tom
    August 14th, 2012 at 09:10 | #24

    @Ernestine Gross

    Although wealth tax is likely to face more political resistance, it is certainly worth consideration and if implemented properly it can be more effective than land tax. Wealth tax is however a power of the federal government while the state do have the power to tax land. In the context of Queensland, if the the premier do believe there is a debt problem (which there isn’t), it can choose to raise land tax (there are others that can be considered) instead of cutting public servants if the fundings from federal government and it’s own tax revenue is inadequate. In the economics context, land tax is usually considered to be a tax is least distorting (although the degree of distortion is not and should not be the most important point of consideration).

  25. Jim Rose
    August 14th, 2012 at 17:04 | #25

    do Australians vote on the basis of who will be deputy PM? would running campaigns against him matter

    even in the hawke-keating years, who voted against Hawke because of Keating?

  26. Freelander
    August 14th, 2012 at 18:04 | #26

    Interesting. Didn’t know Romney-Ryan were running in Australia. The coalition’s deputy prime minister is usually a Nat so why would anyone care. Otherwise, the deputy position, even with labor, in no way means the person is prime minister if the current one is dispatched.

    Nothing like reading the daily Rose magical sermon.

    US commentators seem to think running mate is relevant. But what would they know?

  27. Alan
    August 14th, 2012 at 20:54 | #27

    I seem to recall the Howard campaign running ads against Julia Gillard as a dangerous leftist in 2007. If only they’d known!

  28. Freelander
    August 14th, 2012 at 21:02 | #28

    So seems Howard “was wasting his time” as well. Just on the small ((as it appeared then) chance that Gillard would soon replace Rudd.

    Do these folk not read the Rose sermons?

  29. Alan
    August 14th, 2012 at 21:08 | #29

    I think the problem is that when they read the Rose they edit them to agree with their own opinions or to confect conclusions that are not in the original sermon. Then they add a generic hat tip on the off chance anyone is interested enough to check the levels of plagiarism and fabrication.

  30. Freelander
    August 14th, 2012 at 22:42 | #30

    Quotes from the Rose little Re(a)d book.

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