For decades the political arithmetic of entitlement reform in
Washington has run something like this: you can either raise taxes,
or you can cut benefits.

President Obama has tinkered some around the edges. As part of
Obamacare, he reallocated some planned Medicare spending and also
increased the Medicare tax on the minority of Americans who earn
more than $200,000 a year (or $250,000 for joint filers).

But notwithstanding Obama’s re-election, the Scylla of tax
increases and the Charybdis of benefit cuts are two monsters that
most politicians, and, for that matter, voters, would much prefer
to avoid, and understandably so.

The bill, however, is not so easily dodged. The Baby Boomers are
going ahead and retiring, and aging, without doing much checking
with Washington about whether the Medicare and Social Security
benefits they have been promised are going to be sustainable on a
long-term basis.

That has created an opening in the ideas market for policy
entrepreneurs with concepts of how to solve the entitlement problem
by doing something other than raising taxes or cutting
benefits.

At least two such ideas are worth a look. Jonathan Last, a
senior writer at the Weekly Standard, is the author of
What
to Expect When No One’s Expecting. The book is coming out
later this month, but it’s already attracting attention; it was

excerpted in The Wall Street Journal over the weekend
and is the subject of Michael Barone’s
column this week. Last observes that there is a third possible
solution to the entitlement problem: you can increase the number of
workers, either through immigration or through somehow creating
conditions in which the Americans already here want to have more
children.

Because the workers support the retirees through payroll taxes,
more workers could put the system on a sounder financial basis
without requiring either tax increases or benefit cuts. For
conservatives, the thought of having another child to help support
New Deal or Great Society-era entitlement programs may seem
grim—what’s next, that the government ask that these additional
children be named Franklin or Lyndon? And the chance that an
increased population would put Medicare and Social Security on
firmer ground doesn’t have liberals rushing to reverse Roe v.
Wade or even the free-contraceptives-on-demand provision of
Obamacare, either.

Perhaps immigration reform, where some bipartisan consensus is
afoot in favor of a new law, is more likely, though if prospective
immigrants realize that we’re offering to let them in so long as
they agree to assume a share of the multi-trillion-dollar future
entitlement obligations, it may prove to be a border control
measure more effective than any proposed fence.

If population expansion is not a sure solution, neither is the
solution offered by a second policy entrepreneur, the Nobel
laureate economist Edward Prescott. With a co-author, Ellen
McGrattan, of the Federal Reserve Bank of Minneapolis, Professor
Prescott is out with a new working paper from the National
Bureau of Economic Research, “On Financing Retirement With an Aging
Population,” modeling what would happen if the payroll tax and the
tax rates on capital gains were both reduced to zero. They write,
“The no-capital-income-tax policy results in a large increase in
the value of private business equity …The increase in the market
value of equity permits the financing of retirement consumption
through savings, and there is no need to tax workers’ labor income
to finance lump-sum transfers to retirees.”

Their idea, in other words, is to solve the entitlement problem
not by increasing taxes, but by cutting them.

The paper sounded familiar, and it sent me to a 2005 New
York Sun editorial, “The Prescott
Plan,” which was written after I attended a lunch talk
sponsored by the Manhattan Institute at which Professor Prescott
spoke on “Tax Policy and the Future of Social Security Reform.”

Eight years later, the country is still looking for solutions to
the same problems that President George W. Bush, with both his
immigration and his Social Security reform plans, tried
unsuccessfully to tackle in his second term.

If we’re to avoid having the same discussion eight years from
today—that would be in 2021—with the same low chances of success,
it will be because someone manages to move the entitlement reform
issue outside the frame of raising taxes or cutting benefits and
onto the more promising topic of growth. As remote as the ideas of
both Last and Professor Prescott may seem from the mainstream nuts
and bolts of entitlement reform in Washington, in their own ways
they each move us closer to a solution.