How to Fix America's Broken Entitlements System

It's time to explore all options for entitlement reform.

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.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Virginian||

    One of the many contradictions in what passes for leftist thought is how the strain of environmentalism directly conflicts with the New Deal.

    You can have a stable population or you can have a pyramid scheme retirement plan, but you can't have both.

  • Professional Target||

    Especially not with the inverted pyramid of one-child families.

  • AlmightyJB||

    Actually most economic growth period comes from population growth. If people don't want to have a bunch of rug rats, the people have to come from somewhere. That's why most countries encourage people to have more kids.

  • Death Rock and Skull||

    I am torn between procreating and not procreating, but if I am "supposed" to make kids because it is my "duty" to sustain other peoples' lives, then I will not. I will just have to keep pro-boning.

  • wlion||

    my classmate's half-sister makes $82 an hour on the computer. She has been without a job for six months but last month her paycheck was $13534 just working on the computer for a few hours. Go to this web site and read more http://xurl.es/jlfwz

  • Rich||

  • AlmightyJB||

    This does not shock me.

  • ||

    "...a third possible solution to the entitlement problem: you can increase the number of workers, .."

    Every ponzi scheme/pyramid scheme needs an increasing number of investors. *headsmack*

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

    So they are saying that by us not all paying our fair share....ah fuck it. captain zero will fight this tooth and nail.

    The entitlement problem will be fixed when the system crushes itself under it's own weight. I dont see anything to stop that from happening.

  • ||

    Every ponzi scheme/pyramid scheme needs an increasing number of investors. *headsmack*

    BINGO! The "increasing population" solution only works in perpetuity, and it's exponential. The number of people you'll need 2, 3 generations down the line to support the extra 100 million people you herded in to support the 60 million receiving current benefits is staggering, and difficult to attract when you have a stagnant economy.

  • GregMax||

    They also have to be producing in a magnitude that supports the increasing population. If more people are earning less (adjusted for 'inflation') then you don't just need more people you need a shitload more people.

    It's a mess.

  • Joao||

    Ah, trying to outsmart math. They're so clever. Good luck!

    The math however says "cut spending NOW". If done slowly, it will be 20 years of recession. If done quickly, 3 years of depression. Take your pick. If not done at all, or done too late: the end of our society. No kidding.

    I say it's worth it. But alas, no-one will listen. See u in Argentina. Ciao.

  • Johnimo||

    Joao, don't go gettin' all apocalyptic on us. They can, after all, simply print up some money and have a round of semi-hyperinflation. I suspect that is what they will do, and though it will badly hurt many people financially, it will not be the end of the world. It's what governments have been doing for a thousand years .... they're just a bunch of paper loving crooks, but we'll get through it. I think we're already into the early stages of your "20 years of recession" caused not by cutting spending, but because of excessive spending.

  • 16th amendment||

    There's a fourth way to solve the problem, which is similar to the third. Go to war and annex a country or two. Turn them into a state. Voila, you've increased the population. Social security rescued!

  • Sanjuro Tsubaki||

    Maybe mexico's entitlements system will be fixed. They've already invaded this country.

  • ChrisO||

    Another way (the most likely) is simply to print enough currency to pay everybody what they want. And hey, it's not like doing that could have any serious repercussions.

  • ||

    /Krugman

  • Libertarius||

    Just stop pretending someone else can live your life for you. These entitlements are ridiculous boondoggles wherein anyone with half a brain can figure out that the same money paid into said program has a far greater yield under your own management, even if you're just getting bank interest on it (well, before the government made bank interest 0%, anyway). But these programs enjoy their strongest support from the weakest of mind and constitution...

    In the words of 21st century philosopher Libertarius Maximus, "Man, shit is really fucked up." Time to phase out the welfare state and the Fed, and just repeal that fucking income tax tomorrow. Then get rid of the regulatory state and we have a good chance to save ourselves. 100 years of this bullshit has destroyed our country and turned our people into morons, and I'm supposed to call this "progress"? Fuck you, Orwellian loser-ass "progressive" ball-tucking hipster faggots!

  • Concerned Citizen||

    Couldn't agree more. Stopped for a snack on the way home from work. I could barely understand the mush mouth cashier. To the Obama generation, stupidity is a status symbol.

  • Johnimo||

    Come on, Libertarius, tell us how you REALLY feel.

  • grey||

    Hears an Obama speech today, he kept saying the words "common sense". Is there some new definition of this term that I'm not aware?

  • grey||

    Damn auto correct, Heard not Hears.

  • Irene W. Platt||

    like Allen said I'm taken by surprise that people able to make $4629 in a few weeks on the computer. did you look at this web page... http://www.buzz75.com

  • waaminn||

    Really? Oh wow, I never thought about that dude.

    www.ImAnon.tk

  • ||

    Opening the doors to immigrants that score good grades on an aptitude test would flood the US with a high quality tax paying work force. Slow minded immigrants are not needed, there enough Americans that cannot give change of a twenty dollar bill.

  • Milburn97||

    like Dennis replied I am alarmed that any body able to earn $9519 in 1 month on the internet. did you look at this web page http://www.FLY38.com

  • BMFPitt||

    Last observes that there is a third possible solution to the entitlement problem: you can increase the number of workers

    Sol the "solution" is to push the collapse out past your own life expectancy? Oh well, it's worked so far.

    modeling what would happen if the payroll tax and the tax rates on capital gains were both reduced to zero.

    So are we going to pay current benefits with zero revenue, then?

  • Neville3||

    like Benjamin said I cant believe that anyone can make $4884 in 1 month on the computer. have you read this site http://xurl.es/tt3nh

  • ||

    Welfare clients are so loaded down with freebies that they have no desire to look for a job, most spend their time opening up bags of munchies. There are over 100 million on the dole and the workforce is shrinking by 10 million annually. Illegals are needed to do the full time work.

  • شات عراقنا||

    Nicest chat and chat Iraqi entertaining Adject all over the world
    http://www.iraaqna.com

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online

  • Video Game Nation: How gaming is making America freer – and more fun.
  • Matt Welch: How the left turned against free speech.
  • Nothing Left to Cut? Congress can’t live within their means.
  • And much more.

SUBSCRIBE

advertisement