US young warned: beware the seniors
Stan Druckenmiller - one of the best-performing hedge-fund managers of the past three decades and a former chief strategist for George Soros - has a warning for the youth of America that will resonate through the Western world: don't let your grandparents steal your money.
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.