The Growing Divide

The Growing Divide

In my 2002 book, Rich Dad’s Prophecy, I wrote about the coming stock market crash and retirement crisis as baby boomers began pulling money out of their paper-asset-stocked retirement plans in order to live. And in my latest book, Conspiracy of the Rich: The 8 New Rules of Money, I wrote about how the rules of retirement changed in 1974 with the passage of the ironically named Employee Retirement Income Security Act of 1974 (ERISA). That act paved the way for companies to transition employees from defined benefit (DB) plans to defined contribution (DC) plans and gave birth to the 401(k).

Prior to 1974, employers rewarded workers for years of loyalty and hard work with a guaranteed retirement income. They didn’t have to save for retirement. After 1974, workers had to move a portion of their income into managed accounts stuffed with stocks, bonds, and mutual funds, hoping that the market would grow steadily for many years. Because people were not financially intelligent and didn’t understand the financial markets, a whole new industry was created, financial planning.

The Retirement Bomb
Today, because the rules of retirement changed in 1974, we’re facing a retirement crisis of epic proportions. A recent article on entitled “Dwindling Retirement Savings ‘Undiscussed Explosive Bomb’ Of Recession” points out the growing retirement crisis—and that no one is talking about it. The article opens with the story of 51-year old Rick Stephens: “After working in executive management for over ten years with a steadily increasing salary, Rick Stephens, 51, was laid off from his job in June 2008. Two years of steady unemployment later, he has sold his car, moved in with his 75-year old father and blown through all his retirement savings to stay afloat.” In other words, Rick has gone from middle class to poor in just two years.

I feel for Rick. His story is a sad one, but it’s not unique. And the recent financial crisis is bringing to light the dire condition of the US retirement system. According to a recent survey by the article, 43 percent of Americans have less than $10,000 in savings, 25 percent of the workforce have postponed their plans to retire, and 61 percent of workers say they are living paycheck to paycheck, which is up from 43 percent in 2007.

As the financial crisis grinds on, the baby boomers are getting older and older, closer to retirement age, and increasingly depressed. The gap between the rich and the poor is a growing divide.

Playing by the Rules
One reason why those in the middle class are getting poorer is because they’re playing by the old rules of money. They’ve been taught to go to school, get a good job, and save for retirement in a well-diversified portfolio of stocks, bonds, and mutual funds. Meanwhile, the rich play by the new rules of money and get rich off those stuck trying to play the retirement game in the old system.

The rich get richer because they understand the rules of money and how to use them to their advantage. Goldman Sachs is a good example of this. Many people are lauding President Obama for the passage of his financial regulation bill, FinReg. A key portion of that bill was the Volcker Rule, which I wrote about on this blog (Nothing New Under the Sun). That provision limited “proprietary trading”—making big, often risky, market bets with a firm’s own capital—by big firms like Goldman. As points out in “Goldman Already A Step Ahead Of FinReg”, “Goldman Sachs has figured out a novel approach to getting around the Volcker Rule’s restrictions on trading; it’s remaking its risk-taking traders into asset managers, and the rest of Wall Street may soon follow.”

In my blog on the Volcker Rule, I mentioned how Volcker moved from pushing for something that worked to something that “could be passed.” I pointed out that it’s pointless to fight the system because the banks and the ultra-rich are in control and know how to manipulate the system to their advantage. As the Fox Business article continues, “The move [by Goldman] is designed to exploit a loophole in the Volcker Rule…by having traders work in asset management, where they will take market positions while dealing with clients, Goldman believes it can meet the rule’s mandates, avoid large-scale layoffs, and preserve some of the same risk taking that has earned it enormous profits.”

The Growing Divide
Going forward, the middle class will continue to shrink, and the divide between the rich and the poor will only grow. Those that grow richer will be those who know the rules of money and how to use them to their advantage. Those that grow poorer will be those who play by the old rules of money and expect the government to save them.

I want you to grow richer. Continue your financial education, and understand how to profit from taxes, debt, inflation, and retirement rather than allow them to make you poorer. One way to do that is to visit my new site, This website is completely free to you and features my mini-documentary on the sacred cows of money and why they’re both wrong and dangerous. As time goes on, we’ll be adding other free videos as well. Enjoy.

Original publish date: August 03, 2010