Personal Finance

Billionaire Preaching Doom for Social Security and Medicare: Is He Right?

Source: Stanley Druckenmiller speech at New York University. Data from the Bureau of Economic Analysis and the U.S. Office of Budget and Management.

The troubling conclusion is that these payments are being made instead of investments in research, infrastructure (think America's roads are bad now?), and education. Mr. Canada, one of America's pre-eminent educators, noted that the damage of our government's failure to invest adequately in education will be huge in itself. These investments are, after all, the future of the United States. As Druckenmiller pointed out, government spending has yielded NASA, the semiconductor, the Internet, the Interstate Highway System, and GPS, just to name a few modern benefits we all enjoy. Think for a moment where would the United States be today without these advances.

Transferring wealth from the young to the elderly

This massive increase in entitlement spending, which in the coming years will grow worse due to the rising number of retirees per employed worker, has led to a transfer of wealth on a massive scale from the young to the old over the last 27 years:

Source: Stanley Druckenmiller at New York University. Data from the Federal Reserve Board.

Source: Stanley Druckenmiller speech at New York University. Data from the Federal Reserve Board.

The bottom line: An average 29- to 37-year-old today has a 21% lower net worth, adjusted for inflation, than the average 29- to 37-year-old did in 1983. An average 74-year-old today, however, has a 150% higher net worth, adjusted for inflation, than the average 74-year-old did in 1983.

Sound crazy? It is.

This massive wealth transfer happened because entitlements to the elderly continued to rise while expenditures to the young (and their children) stayed flat or even fell. One reason for this, as put forth by Druckenmiller, is that elderly Americans vote in greater numbers than the young, leading politicians to focus on them as a voting block in order to protect their own positions of power. Druckenmiller notes that the injustice of this aside, a very real result has been an increased poverty rate among the young (particularly amid minorities) versus the elderly:

Source: Stanley Druckenmiller speech at New York University. Data from U.S. Census Bureau.

Why should the elderly be favored so much more than the young, asks Druckenmiller?

The fact that the poverty rate among seniors is the lowest it's ever been is a laudable achievement. Unfortunately, the total drop in the national poverty rate over the last 50 years has been concentrated solely on the elderly -- no other age bracket. The mental picture of elderly individuals incapable of supporting themselves tugs at the heart strings, but do we want to pay these benefits at the expense of the young?

It's about to get a lot worse

Life expectancy in the U.S. has risen steadily throughout the last century, all while the age at which one begins receiving benefits has more or less stayed the same. In 1900 the average life expectancy in the U.S. was 47.9 years for men and 50.7 years for women. By 1940 it had risen to 61.6 years and 65.9 years for men and women, respectively. And today? Men are expected to live to 74.9, while women are expected to reach 79.9 years on average.

The comical conclusion is that when Social Security was created, most Americans couldn't be assured that they would even live to receive a single monthly check! The original purpose of Social Security was to ensure that those living past their life expectancy didn't spend their remaining years in poverty. It was not meant to be a wealth-building income stream for retirees.

As things stand now, given current tax rates and current promises to retirees, federal spending on entitlements is about to explode, not just as a percentage of the budget, but of the entire economy .

Source: Stanley Druckenmiller at New York University. Data from the Congressional Budget Office.

Source: Stanley Druckenmiller speech at New York University. Data from the Congressional Budget Office.

According to Druckenmiller, the America of the future will be vastly different from the one we know today. Here are some other troubling facts he has highlighted in his talks:

  • The fastest-growing age group isn't 20-year-olds, 50-year-olds, or even 80-year-olds. It's centenarians -- those aged 100 or older!
  • Since 2013, about 11,000 baby boomers per day are becoming entitlement-drawing seniors, and this will continue until 2035.
  • By 2030, there will be half as many young people working to support the old as there are today.

Needless to say, things don't look good. Fortunately, these are only projections, and they involve a large number of assumptions.

All may not be lost

Economic growth rates can have a big effect on our ability to pay our obligations as a nation. Faster-than-expected growth rates solve many woes, while slower-than-expected growth brings into question a nation's financial solvency, as we've seen with France recently. The level of productive ingenuity in the United States is something we have going for us. Who would have predicted the technological boom of the 1990s or the economic growth that it would produce? Growth like that cannot be predicted, and had you told someone in 1990 what would happen in the proceeding 10 years, they would have said you were crazy. We can't count on faster-than-expected growth, but we can't discount it, either.

The same line of thinking applies specifically to Medicare, which inherently relies upon unpredictable medical costs. Even a slight decrease in the cost of medical care for the elderly will help balance the scales. It's also not unthinkable that disruptive technological advances are in the offing.

The potential fixes are numerous, and there are a number of levers we can pull. Make no mistake, though: None of these options is easy, and all would require making some tough decisions. Mr. Druckenmiller, who is right to draw attention to this issue, isn't the only one doing so. Numerous agencies, think tanks, periodicals, and economists have put forth manageable yet painful fixes. Some of them include 10%-20% benefit reductions, an increased retirement age, and tax increases.

The proposed fixes vary widely, but one thing everyone, Mr. Druckenmiller included, agrees upon is this: The worst thing we can do as American citizens is nothing.

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The article Billionaire Preaching Doom for Social Security and Medicare: Is He Right? originally appeared on Fool.com.

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