The Collapse of the U.S. Economy

Next in Line for a Bailout: Social Security

February 4, 2010

Fortune on CNNMoney.com - Don't look now. But even as the bank bailout is winding down, another huge bailout is starting, this time for the Social Security system.

A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits.

Instead of helping to finance the rest of the government, as it has done for decades, our nation's biggest social program needs help from the Treasury to keep benefit checks from bouncing -- in other words, a taxpayer bailout.

No one has officially announced that Social Security will be cash-negative this year. But you can figure it out for yourself, as I did, by comparing two numbers in the recent federal budget update that the nonpartisan CBO issued last week.

The first number is $120 billion, the interest that Social Security will earn on its trust fund in fiscal 2010 (see page 74 of the CBO report). The second is $92 billion, the overall Social Security surplus for fiscal 2010 (see page 116).

This means that without the interest income, Social Security will be $28 billion in the hole this fiscal year, which ends Sept. 30.

Why disregard the interest? Because as people like me have said repeatedly over the years, the interest, which consists of Treasury IOUs that the Social Security trust fund gets on its holdings of government securities, doesn't provide Social Security with any cash that it can use to pay its bills. The interest is merely an accounting entry with no economic significance.

Social Security hasn't been cash-negative since the early 1980s, when it came so close to running out of money that it was making plans to stop sending out benefit checks. That led to the famous Greenspan Commission report, which recommended trimming benefits and raising taxes, which Congress did. Those actions produced hefty cash surpluses, which until this year have helped finance the rest of the government.

But even then, it was clear the surpluses would be temporary. Now, years earlier than projected, Social Security is adding to the government's borrowing needs, even though the program still shows a surplus on paper.

If you go to the aforementioned pages in the CBO update and consult the tables on them, you see that the budget office projects smaller cash deficits (about $19 billion annually) for fiscal 2011 and 2012. Then the program approaches break-even for a while before the deficits resume.

Social Security currently provides more than half the income for a majority of retirees. Given the declines in stock prices and home values that have whacked millions of people, the program seems likely to become more important in the future as a source of retirement income, rather than less important.

It would have been a lot simpler to fix the system years ago, when we could have used Social Security's cash surpluses to buy non-Treasury securities, such as government-backed mortgage bonds or high-grade corporates that would have helped cover future cash shortfalls. Now it's too late.

Even though an economic recovery might produce some small, fleeting cash surpluses, Social Security's days of being flush are over.

To be sure -- three of the most dangerous words in journalism -- the current Social Security cash deficits aren't all that big, given that Social Security is a $700 billion program this year, and that the government expects to borrow about $1.5 trillion in fiscal 2010 to cover its other obligations, about the same as it borrowed in fiscal 2009.

But this year's Social Security cash shortfall is a watershed event. Until this year, Social Security was a problem for the future. Now it's a problem for the present.

Obama Budget Seeks to End Oil, Gas Subsidies

February 1, 2010

Reuters - The Obama administration on Monday asked Congress for a second time to end some $36.5 billion in subsidies for oil and gas companies, saying it would help fight global warming.

In its proposed budget for the government's 2011 spending year that starts October 1, the administration said eliminating the subsidies would "foster the clean energy economy of the future and reduce our reliance on fossil fuels that contribute to climate change."

The industry tax breaks that would be lost include: deductions for certain drilling costs, tax credits for low-volume oil and gas wells and a manufacturing tax deduction for oil and gas companies.

"We will not continue costly tax cuts for oil companies," President Obama said.

The changes would take effect on January 1, 2011, and save $36.5 billion over 10 years, according to the budget proposal.

This is the second year the administration has sought to end the subsidies. The move has been strongly condemned by oil and gas companies, which argue that abolishing the tax breaks would reduce domestic drilling, cost jobs and increase U.S. reliance on foreign energy suppliers.

"With America still recovering from recession and one in 10 Americans out of work, now is not the time to impose new taxes on the nation's oil and natural gas industry," said Jack Gerard, president of the American Petroleum Institute.

Devon Energy Corp spokesman Bill Whitsitt said repealing the tax breaks would "slow down a real revolution" in growing natural gas exploration.

"We applauded the president last week during his State of the Union address for stating his desire to increase domestic energy production," said Charles Drevna, president of the oil refiners trade group. "The additional taxes on our businesses run counter to those stated objectives, however, and will do nothing to stimulate increased investment."

U.S. Interior Secretary Ken Salazar disputed the oil and gas industry's contention that removing the subsidies will slow domestic oil and gas production.

"All you have to do is to look at record profits in the oil and gas world over last several years and, in my view, you're going to continue to see a great interest in oil and gas because it's an essential part of our economy today," Salazar said. "I think the oil and gas industry will do just fine."

The White House justified its action by pointing out that the United States and other industrialized countries agreed last year to phase out fossil fuel subsidies, which could reduce global greenhouse gas emissions by 10 percent.

It also said ending the subsidies would not have much of a financial impact on energy companies, as $36.5 billion represents about 1 percent of expected domestic oil and gas revenues over the coming decade.

While the Obama administration slammed the oil and gas industry in its budget, renewable energy got a funding boost.

Research and development for solar energy was given $302 million, up 22 percent; wind energy received $123 million, a 53 percent increase, and geothermal energy was given $55 million, up 25 percent.

FACTBOX: Renewable energy targets around the world
Is coal on the decline?
Expect demand for renewable and nuclear technologies to outstrip growth in coal and gas-fired electricity projects, a chief executive of power equipment maker Alstom said from the World Economic Forum in Davos, Switzerland.
Clean tech sector seeks long term support from Obama
Clean technology companies welcomed nearly $2.4 billion for the sector in the Obama administration's proposed budget released on Monday, but some industry watchers said it wasn't enough for major changes in the emerging market or for long-term growth.
Obama set to outline biofuels strategy
President Barack Obama on Wednesday will outline a government strategy to boost development of U.S. biofuels and address their environmental challenges, an administration official said.
Obama seeks to boost nuclear power in new budget
President Barack Obama's budget proposal will call for tripling government loan guarantees for new nuclear reactors, an administration official said on Friday, a move sure to win over some Republican lawmakers who want more nuclear power to be part of climate change legislation.