US young warned: beware the seniors
Mr Druckenmiller, 59, was highlighting the drain of the baby boomers on later generations, and said the mushrooming costs of social security, Medicare and Medicaid, with unfunded liabilities as high as $US211 trillion, would bankrupt the nation's youth and pose a much greater danger than the country's $US16 trillion of debt being debated in Congress.
"While everybody is focusing on the here and now, there's a much, much bigger storm that's about to hit," he said.
"I am not against seniors. What I am against is current seniors stealing from future seniors."
Unsustainable spending will eventually result in a crisis worse than the financial meltdown of 2008, when $US29 trillion was erased from global equity markets, Mr Druckenmiller said. What was particularly troubling was government expenditures related to programs for the elderly rocketed in the past two decades, even before the first baby boomers, those born in 1946, started turning 65.
He stopped managing money for outside clients in 2010 after three decades in the business, including more than a decade as chief strategist for billionaire George Soros. From 1986 through 2010 he produced average annual returns of 30 per cent, one of the best long-term track records in the industry.
"The seniors have a very, very powerful lobby," Mr Druckenmiller said. "They keep getting more and more transfer payments" from younger generations through what was essentially a pay-as-you-go system.
In 2011, Social Security, Medicaid and Medicare accounted for 44 per cent of the government's $US3.7 trillion in expenditures, up from 34 per cent in 1990, according to statistics compiled by the Bureau of Economic Analysis.
There were 40 million people aged 65 and over, according to the 2010 US census, the year before the first baby boomers hit retirement age. By 2020, that number is expected to grow to 55 million.
As the elderly population increases, the number of workers who pay into Social Security is dropping. By 2030, there will be about two workers for each retiree, down from 3.4 in 2000, according to the 2004 book The Coming Generational Storm by Laurence Kotlikoff and Scott Burns. Three-year-olds born today and taxed at the same rate as today's working population, will get less than half of the benefits that seniors are getting now, Mr Druckenmiller said.
The usually media-shy Mr Druckenmiller said he chose to speak out because he hadn't done enough before the financial crisis.
As early as 2005, he said, he forecast the impending real estate crisis and its effects on banks "backing all those silly instruments". He met a couple of policymakers and a representative of the Congress at the time.
"I had my 30 charts with colours and pictures and laid out for them why I thought it was going to be a huge, huge problem for the US economy and the US financial system," he said.
Stocks might continue to rise for a while because companies were buying back shares and retail investors were coming back to the market in search of returns, he said, but the gains probably would not last.
"The chances of this being a new bull market like 1982 are not high because we're not attacking the crux of the problem, which is too much leverage and too much debt," he said. "I don't know the timing of when the markets will respond to this, but it will happen."
Mr Druckenmiller said his next step was to talk to young people directly, including at his alma mater, Bowdoin College in Maine.
Young people today were looking at the environmental consequences of our actions 50 to 60 years ahead, he said. His goal now was to get them to have the same far-sighted reaction to their economic future.
Frequently Asked Questions about this Article…
Stan Druckenmiller is a highly successful hedge‑fund manager and former chief strategist for George Soros who produced average annual returns of about 30% from 1986–2010. He’s warning everyday investors that rising costs for Social Security, Medicare and Medicaid and huge unfunded government liabilities could create a major economic storm that will affect markets and future returns.
Druckenmiller highlighted unsustainable government spending on elderly programs and very large unfunded liabilities (he cited figures as high as US$211 trillion). He said too much leverage and too much debt are the crux of the problem, and that this could trigger a crisis worse than the 2008 meltdown — a risk that could eventually hurt stock market gains.
According to the article, Social Security, Medicare and Medicaid made up 44% of US government expenditures in 2011 (out of about US$3.7 trillion), up from 34% in 1990. Druckenmiller pointed out that spending on programs for the elderly has rocketed in the past two decades, increasing pressure on public finances.
The article notes that there were 40 million people aged 65+ in 2010 and that number was expected to grow to 55 million by 2020. It also cites research projecting that by 2030 there will be about two workers paying into Social Security for each retiree, down from 3.4 workers per retiree in 2000 — a demographic shift that strains pay‑as‑you‑go systems.
Druckenmiller argued that current seniors receive increasing transfer payments via a powerful political lobby and a pay‑as‑you‑go system, which could place a heavy fiscal burden on younger generations and future retirees if reforms are not made. He characterized this dynamic as current seniors effectively taking resources from future seniors.
The article reports Druckenmiller’s view that stocks might continue to rise in the short term because companies are buying back shares and retail investors are returning to the market, but he warned those gains probably would not last if the underlying problems of excessive leverage and debt are not addressed.
Druckenmiller said he’d earlier warned about the 2005 real estate crisis and its effects on banks, and that his experience motivated him to speak out. He now aims to talk directly to young people (including at his alma mater Bowdoin College) to encourage far‑sighted thinking about long‑term economic and fiscal risks.
The article’s takeaway is that large, rising government obligations to the elderly and high public and private leverage pose systemic risks. Everyday investors should be mindful that demographic and fiscal pressures could affect markets over the long term, and that these are issues policymakers and investors will need to confront.
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