Stan Druckenmiller, one of the best performing hedge-fund managers of the past three decades, as well as a Bowdoin College alum, has a warning for the youth of America: Don’t let your grandparents steal your money.
Druckenmiller, 59, said the mushrooming costs of Social Security, Medicare and Medicaid, with unfunded liabilities as high as $211 trillion, will bankrupt the nation’s youth and pose a much greater danger than the country’s $16 trillion of debt currently 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,” Druckenmiller said in an interview on Bloomberg Television’s “Market Makers.” “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 $29 trillion was erased from global equity markets, Druckenmiller said. What’s particularly troubling is that 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.
Druckenmiller 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 percent, one of the best long-term track records in the industry.
“The seniors have a very, very powerful lobby,” Druckenmiller said. “They keep getting more and more transfer payments” from younger generations through what’s essentially a pay-as-you-go system.
In 2011, Social Security, Medicaid and Medicare accounted for 44 percent of the government’s $3.7 trillion in expenditures, up from 34 percent in 1990, according to statistics compiled by the government’s Bureau of Economic Analysis.
There were 40 million people ages 65 and over, according to the 2010 U.S. Census, the year before the first baby boomers hit retirement age. By 2020, that number is expected to grow to 55 million, according to the Department of Health and Human Services.
As the elderly population rises, the number of workers who pay into Social Security is dropping. By 2030, there will be about two workers per retiree, down from 3.4 workers in 2000, according to the 2004 book “The Coming Generational Storm” by Laurence Kotlikoff and Scott Burns. If a 3-year-old born today is taxed at the same rate as today’s working population, he will get less than half of the benefits that seniors are getting now, Druckenmiller said.
The usually press-shy Druckenmiller said he chose to speak out now 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 with a couple of policymakers and a representative of the Congress at the time, and also spoke at the Ira W. Sohn Investment Research Conference in New York.
“I had my 30 charts with colors and pictures and laid out for them why I thought it was going to be a huge, huge problem for the U.S. economy and the U.S. financial system,” he said in the interview.
Today he sees an even bigger reason for concern because of the government’s massive unfunded liabilities. He also sees trouble with what he calls its trickle-down monetary policy.
The Federal Reserve’s decision to hold interest rates near zero and buy $85 billion of assets a month is pumping up the stock market, all with the hope that rich people will spend those gains, and that money will trickle down to the rest of the country.
Stocks may continue to rise for a while because companies are buying back shares and retail investors are coming back to the market in search of returns, he said. But the gains probably won’t last.
“The chances of this being a new bull market like 1982 aren’t 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.”
Druckenmiller said his next step is to talk to young people directly, including at his alma mater, Bowdoin College in Brunswick, Maine.
“Look at our young people who are obsessed with the environment,” said Druckenmiller, who sits on the board of the Environmental Defense Fund. “They are looking at the consequences of our actions 50 to 60 years from today.”
His goal is to get them to have the same far-sighted reaction to their economic future.
“With the proper education and with proper voices out there, we could have 40 million kids marching down to Washington.”