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Stanley Druckenmiller: An Unsustainable Financial Situation

Stanley Druckenmiller, chairman, founder, president and CEO at Duquesne Capital Management, speaks at TEDxWall Street.

DRUCKENMILLER: I know what you're thinking. You're thinking, what on Earth is a retired money manager who is knocking on the door of senior citizenship doing up here busting on old people and declaring war on entitlements? The answer is, I'm not. Yes, I am approaching the age of 65, but I am not up here to suggest that boomers go bust. I think Social Security, Medicare and Medicaid are one of the great achievements of American government in the last 50 years.

Look at the chart behind me, and what you will see in the red line is the poverty rate for seniors since the 1960s. And, incredibly, it's dropped from 30 percent to less than 10 percent. This is a great triumph that I think we should want to perpetuate for the next 50 years and our future seniors, our kids. Unfortunately, if we don't reform current policies, that's not going to happen.

I made a lot of mistakes in my career, some of them real doozies I'd rather forget, but if there was one thing I was good at it was analyzing unsustainable situations and the problems they would lead to. And when I look at the current situation regarding the funding of entitlements for future seniors, it is the most unsustainable situation I have ever seen in analyzing 35 years of data.

Now let me tell you what I'm not saying. I am not saying we're doomed. This thing is absolutely fixable, but if the coverage is not going to be there for our grandkids, we need to get moving on it sooner rather than later. And, frankly, this is personal for me. Bob mentioned that I'm chairman of the Harlem Children's Zone. In that capacity, Geoffrey Canada and I, my partner, are promising three-year-olds that if they play by the rules and stay in school, when they graduate in 20 years there'll be a job waiting for them and a shot at the American dream.

If we don't reform current policies, that's less likely to happen, and Geoff and I do not want to break our word to these kids. And these kids are already behind the eight ball. You see the poverty rate for seniors has gone down the last 30 or 40 years. Look at what's happened for children. It's actually gone north from 20 to 23.5 percent. Think about that. Almost one in every four children in the United States of America lives in a state of poverty. That’s an outrage.

One way to think about it: Of the top 35 industrial countries in the world, we have the second highest poverty rate. The only country with a higher poverty rate is Romania. Latvia and the other 33 countries beat us handily.

Now, if you look at the next chart, it goes a long way toward explaining why. You see in the red and the blue bars the per capita spending of the average American worker supporting our elderly and our children. And what you'll see is back in 1960, 15 cents out of what every American worker earned was spent supporting the elderly. Today that number is up to 57 cents. So, 57 cents out of every dollar an American worker makes is spent to support seniors. But look at what we're doing with children. Nothing like that. One cent to nine cents over the same time period.

So a greater and greater share the economic pie is being allotted away from children and toward the elderly. Now, I'm sure you’ve all been as discouraged as I have watching the farce down in Washington the last 12 months called the budget battle. But the one thing you saw from both sides of the aisle was politicians falling all over themselves to say they were not going to balance the budget on the backs of seniors. Well, you know, for once these clowns kept their promises. They balanced it on the back of our kids.

Think about this: Even after this increase in the share of the pie for 50 years, the next 10 years, if you look at the federal budget, it's projected to grow just over a trillion dollars. Of the trillion dollars, $780 billion dollars of it is going to go to Social Security, Medicare and Medicaid. How much of it do you think is going to go to children? Anybody? $20 billion. $780 billion more for the elderly. $20 billion for children.

Now, if you look at the next chart, you'll see that this is happening during a period when the elderly have actually been doing quite well. This chart shows you the net worth of various age groups from the boomers on up from 1983 to 2010, and what you'll see is they've all had substantial increases, particularly up in the higher age groups. So a 75-year-old in 2010 was worth 150 percent more than a 75-year-old in 1983.

But look at the red bars: The children, I'm sorry, the young, are not doing nearly as well. In fact, I want you to zero in on the middle bar, which is 29 to 37-year-olds. They're not worth 150 percent more, the way the 75-year-olds are. They are worth 20 percent less than 30-year-olds were in 1983. I don't have data going all the way back, but I would have to believe this is the first generation that is actually worth less than their predecessors.

We’re about to experience a whole new problem, and that is the fact that the elderly are about to explode as a percentage of the overall population. I think most people in this room know just after World War II we had a 20-year baby boom, which is starting now about to become a 20-year gray boom.

One way to think about that is this: In 2030, the average age of a U.S. citizen will be more than the average age of a Floridian today.

So, all these strollers you see, they're probably going to be walkers. I know it's a little bit funny, but it's also not so funny because the way our entitlement system is financed, it's not pay as you go. Current workers pay for current seniors, so any dramatic increase in seniors relative to workers creates a funding problem. And, specifically, if you look at this chart up here, you see the dependency ratio. And because the seniors are going to grow so much faster than the working age population, 4.8 workers today supporting a senior becomes 2.5 workers in 2030 and after supporting a senior. That's a problem.

I think the best way to think about it is in layman's terms. As of now we are creating, because of the gray boom, 8,000 new seniors every day. By 2029, we’ll be creating 11,000 new seniors a day. So, in order to fund them in balance, you'd want to be creating 8,000 new young adult workers a day. How many adult workers do you think we're creating a day? 2,000. So we've got 8,000 new dependents every day on the entitlement rolls and only 2,000 kids -- I'm sorry, young adult workers -- to fund them. If that doesn't spell unsustainability, I really don't know what does.

Now, if you look at financial history, it seems that it's littered with stories of pernicious behavior that lasted much longer than it otherwise would have if liabilities are hidden off the balance sheet. I guess the most recent examples in corporate terms would be Enron, and in the government terms it would be Fannie and Freddie. There were $5 trillion of them.

So, incredibly, all these future payments, benefits we’ve promised to seniors are nowhere to be found on the U.S. balance sheet. They do not exist as far as the U.S. government is concerned. How does that work? Well, if I'm a current worker, I pay something called a payroll tax, and the deal is, when I turn 65, the government pays me back in a stream of benefits. So I think anybody in the audience would agree, if you borrow money from me, and I was going to get paid back after you were 65, there would be a debt here. There would be an IOU. Well, every corporation in America that does gap accounting would agree — well, maybe with the exception of Enron, but every other corporation would agree, and I think everyone in this room would agree. So, if you took these promises that we’ve made to our seniors and put them on the balance sheet, what would it do to the current U.S. government debt?

As we know, there's a lot of people walking around talking about how the U.S. government debt is $17 trillion dollars. I wish it was $17 trillion. It’s actually $205 trillion if you add in these liabilities.

So, it's pretty simple. If you take current benefits promised plus the fact that you're creating so many new seniors versus workers plus expected tax revenues, the numbers just don't add up. Well, actually they do. They add up to a $200 trillion burden on the next generation.

I was a professional investor from 1981 to 2010. During that time period -- 30 years -- I know it's immodest to say, but my firm never had a down year. Now, if you think about those 30 years, there were a few recessions, there was a stock market crash, there was a dot-com crash, there was the U.S. financial crisis, there was the Great Recession, and yes, we were short Enron.

How did we do it? Very simple. While others were focusing on the present, we looked and focused on the future in terms of analyzing unsustainable situations. And when I look at the current picture of expected tax revenues combined with benefits promised to future generations, this is the most unsustainable situation I have seen ever in my career.

Now, the good news is it has a long time fuse, and it’s absolutely fixable. I actually have a view on what some of the solutions are, but I don't have a monopoly on the truth, and that's not why I'm here today.

But there is one thing I want to say. I totally disagree with those that say we can wait 20 years to solve this problem. And there's two reasons. The first reason is if you wait 20 years to solve this problem, by the time you're at that time period, the interest payments on the debt alone will start to challenge the entitlements as a problem. It's not unlike climate change. Just because the problem doesn't manifest itself for decades doesn’t mean that you should wait till the 11th hour to solve it because then the conclusion is preordained.

But there's a more important reason for me, and that is the general issue of fairness. Every day we wait, more and more of the burden falls on a future generation.

And let me close with a simple example. You remember the kids I talked about earlier in Harlem, the three-year-olds? It just so happens in 20 years when they first join the workforce, that will be the year 2033. Almost all experts agree if we don't make adjustments, in 2033 the Social Security Trust Fund will run out of money. Everybody also agrees it’s an easily fixable problem.

One solution would be to raise the payroll tax from 12 to 15 percent now, and you're done. Another possible solution would be to raise the payroll tax in 20 years, but then you'd have to raise it to 16 percent.

So I ask you, is it fair that I and the other boomers get to pay 12 percent through our working career, but these kids who are starting their working career in 2033 have to pay 16 percent? It's ridiculous, and it's wrong.

Please, let's stop kicking the can down the road. None of us want the poverty rate for the elderly to go back up to 30 percent before our kids and our grandkids are seniors.

Thank you very much.

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