Iconic hedge fund manager Stanley Druckenmiller, the founder of Duquesne Capital Management, has been vocal for the past several months about the issue of generational theft.
Druckenmiller, who accurately called the housing crisis, has said he sees another “storm” coming due to entitlement transfer payments. Entitlements are things like Social Security and Medicare that primary go to older, retired workers.
The billionaire fund manager believes that seniors in this country are essentially stealing from the young via these entitlement transfers. What’s more is he thinks it could result in a crisis even more devastating than 2008.
Druckenmiller, 60, will be visiting various college campuses this fall to talk about this issue with the younger population. We found a video of his presentation he gave at his alma mater Bowdoin College in Maine a few months ago.
Druckenmiller told the Bowdoin students that he started worrying back in 1994.
“The reason was because…it was demographics because I knew that in 2011 the ‘Baby Boomers’…the front end was going to turn 65 and you were going to have this huge surge in entitlement payments because again the biggest buckets of entitlements are for the elderly.”
He also shared 16 charts with the students and explained why it’s such a pressing matter that should be addressed now. We’ve included his charts and commentary in the slides that follow.
This chart shows Federal Entitlement Transfers as a percentage of Federal Budget Outlays. Back in 1960, they were 28%. In the last two years, they're up to 68%.
This chart is just Medicaid, Medicare and Social Security. Since 1970, the benefits per 'oldster' have grown from 41% to 72%.
Druckenmiller says the problem is the 'Baby Boomers' moving into retirement. That population is about to explode, he says. He points out that the old now consume a lot more in their 70s than they did in their 20s.
Druckenmiller notes that the poverty rate for the elderly has been significantly reduced since the 1960s. It was 35% and now it's 9%. The needle hasn't moved very much for children over that time.
The other issue is young people aren't having as many babies now. In the 1950s, women used to have an average of 3.7 children. Now that number is 2.06. There were fewer people in the U.S. in the 1950s, but they were having more babies. Now those babies are about to turn 65 and start collecting their benefits.
The other issue Druckenmiller highlights is that life expectancy has gone up. He says not only are there more old people, but they're going to be living longer and taking more entitlements.
Druckenmiller says that by 2050, the Baby Boomers will be taking over 20% of the GDP in entitlements. He says historically tax revenues as a percentage of GDP have a ceiling around 20%, so the entire GDP of America will be spent giving money to people who don't provide a current service.
From now until 2050, Druckenmiller says that the working age population, those 18 to 64, is only going to grow 17%. Seniors will grow 102% during that time. Right now, there are 4.8 workers supporting each retiree. By 2030, that number will be 2.9 and by 2050 it will be 2.4.
Druckenmiller says the current debt is a lot bigger than we think because of what's off the balance sheet. He says if you take the present value of expected tax revenues and you subtract present value of the benefits we promise, the current debt present value is $US211 trillion dollars.
Raising everyone's taxes isn't a viable solution. You'd have to raise everyone's taxes (income, payroll, capital gains, dividends) 64%. Cutting all government spending wouldn't work either. You'd have to cut all of it (defence, entitlements, Head Start, etc.) by 40%. If we wait 20 years, those numbers would be 77% for taxes and 46% for government spending, though.
He says that raising taxes on the rich wouldn't work either. If you raised the tax rate on all millionaires from 40% to 50%, it would only raise $US92 billion. That doesn't even move the needle. Plus, people wouldn't work at 50% because all of their income for the first six months of the year would essentially go to someone else.
He notes that the U.S. spends $US711 per year on defence. He thinks there's room for cutting defence, but it doesn't move the needle enough. It's not the answer.
He says that capital gains really annoys him. He said that the rich people are the ones who own stocks and bonds. 'So basically you have a 35-year-old plumber paying a higher tax rate than some 65-year-old coupon clipper. It doesn't make a lot of sense to me.'
Druckenmiller says that on average 90-year-olds today are spending 135% of what the average 40-year-old is making and they're spending about twice what the average 30-year-old is spending. He says the biggest part of their spending is on health.
This chart shows what the U.S. spends on health care relative to other countries as a percentage of our GDP. We spend more than any other country.
Druckenmiller says that our health care system is screwed up. One reason is malpractice insurance. He says lawyers take large share of what would be physician income. Then, malpractice insurance also incentivizes hospitals to run all these unnecessary tests and the costs go up dramatically.
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