There’s an old story – we first heard it from the syndicated columnist George Will – about several persons trapped in a deep pit. They thought they were out of luck until the economist in the group said, “Assume a ladder.”

We were reminded of this by the presentation given yesterday at a lunch in New York by Edward Prescott, who holds the W.P. Carey chair of economics at Arizona State University and who won the 2004 Nobel Prize in economics. His topic was “Tax Policy and the Future of Social Security Reform.” We think we understood him correctly when he proposed to convert the Social Security program for those now 39 and under to a program of personal accounts, with the value of the accounts set initially at zero.

Well, there’s an assumption that will evaporate when some unwary politician tries to climb up it. A 38-year-old worker with a healthy salary could have paid as much as $136,000 in payroll taxes into the system already. To tell that individual that none of that money will be there for him in retirement would provoke a political backlash from which a politician would only be able to shield himself by assuming a nuclear fallout shelter.

It would be a shame if the rest of Mr. Prescott’s presentation, which was sponsored by the Manhattan Institute, were to be lost amid the adverse reaction to that particular element of it. Mr. Prescott spoke of a concept called “aggregate labor supply elasticity.” It turns out, he says, that when you increase after-tax real wages by lowering taxes, more people join the workforce or work more hours in it.

Eliminating the current 10.6% Social Security retirement tax with a system of mandatory 10.6% savings accounts, he predicted, would cause the American labor supply to increase 17.7% and cause real wages to increase 6%. In this calculation Mr. Prescott was leaving in place some components of Social Security such as disability-related payments.

This thesis is not built out of an abstract assumption made by a theorist in a pit. Some of the most important of Mr. Prescott’s work has been analysis of Europe. Available on the Web site of the Federal Reserve Bank of Minneapolis, at minneapolisfed.org, is his history of what happened to willingness to work in Europe. Thirty-five years ago, individual Europeans put in more hours a week than individual Americans. Some of this was due to the drive to pull Europe back after the Second World War. Some of this was due to the fact that European tax rates were more or less comparable to American ones at the time.

Today, Americans put in longer hours than citizens of Germany, France, and Italy – 50% longer. The gap correlates to increases in European payroll and income taxes. Today, European burdens weigh far more than American burdens, especially when one includes their health insurance costs. As a result, Europeans have chosen to stop working.

One striking finding by Mr. Prescott is what happened after Spain, a relatively high-tax country, flattened its tax schedule in the 1990s. The idea was to copy President Reagan’s 1986 reform. The move worked. The country’s supply of labor – the total number of hours people were willing to work – went up 12%. Tax revenues, by the way, went up as well.

The important point here is how such changes affect the fiscal position of programs like Social Security. For when people work harder and longer, they also help to make their social insurance programs solvent.

Such knowledge is the sort that informs any evaluation of the current plans to reform Social Security in Washington. This newspaper has invested a significant amount of ink in making the case that lifting the Social Security cap is a bad idea. For that we, and our allies on this topic in Washington, have been assailed as defenders of the rich. But subjecting all of high earners’ income – and not merely the first $90,000 or so, as currently – to the burden of the payroll tax would represent the sort of marginal rate increase that Europe underwent in the period that Mr. Prescott studied.

Instead of a top rate of 35%, lifting the cap moves one close to 50% if one includes the employer side of the equation. Those who want to do the precise calculation start with the 35% top rate, add 12.4% for Social Security, and 2.9% for Medicare tax. There is also the 1.05% increase generated by the Pease Deduction phaseout.

In other words, the successful entrepreneur would incur an effective top marginal rate above that in the late 1980s or the 1990s. You have to go back to 1984 to find a comparable level. But no need to crunch numbers to get the point. As high unemployment zones like Europe show, changes like lifting the cap that are made in the name of fiscal solvency are a terrible idea. They can even offset whatever incentives are offered by the new personal accounts that may come with them.

We’re not here endorsing the Prescott plan, but his insight – that a decision to allow workers to keep more of what they earn would mean that more Americans would decide to keep working instead of retiring or staying home – is central for policymakers to keep in mind as they consider an overhaul of Social Security.