The Law That Changed the World
On September 2, 1974, ERISA—the Employee Retirement Income Security Act—was signed into law by President Gerald Ford, who had just replaced Nixon. ERISA morphed into the popular 401(k) plans that many U.S. employees now subscribe to.
This meant that businesses no longer had to care for their employees after they retired. It also meant that there would forever be money flowing into Wall Street from the middle-class. This benefited the rich in two ways:
- The rich no longer had to pay for their retired employees. The elderly were left to fend for themselves.
- The middle-class was now sending all of their money to the ultra-rich on Wall Street through the 401(k) mechanism.
If you look at the 401(k) plans, you wonder how anyone can retire on it. It’s a very simple machine: it takes money from the working class and funnels it to the financial institutions (also known as the controlling rich). They legally keep a huge chunk of the accounts’ earnings and don’t hide it. Why would they?
What other choice does the public have?
ERISA made promises of a good life after retirement. The reality is that the majority of people will not have enough money to retire on with the standard of living that they are used to.
Look closely at the titles of many government acts, such as the Affordable Care Act. Oftentimes they are exactly the opposite of what the title implies. Specifically, we’re learning that the Affordable Care Act actually made health insurance more expensive for many workers.
My Retirement Lesson
Rich dad, Mike, and I went to one of our favorite Chinese restaurants for lunch. As usual, the place was packed because the food was good, the service fast, and the prices fair. We had to wait a few minutes before a table opened. Our favorite waiter cleaned it as we took our seats.
As we looked through the menu, rich dad said to me, “Most people will not have enough money set aside for their retirement. In fact, I would be willing to bet that most of the people sitting in this restaurant will never be able to retire, simply because they have nothing in their retirement plans.”
“You mean the workers here?” Mike asked. “People like our waiter and those who cook and wash dishes in the back?”
“Not only the restaurant workers, but many of the executives in suits and ties who are dining here will have nothing or will not have enough money to retire on. Most of the people in this room will never be able to afford retirement.”
“Most?” I asked in surprise. “Wouldn’t it be more accurate to say some rather than most?”
“No,” said rich dad. “I believe the more accurate word is most, not some.”
“How can that be?” I asked. “Most seem to have good jobs. They dress well and appear to be rather intelligent.”
“Do you remember me telling you about ERISA?” asked rich dad.
“Yes, vaguely,” I replied. “You’ve mentioned it on several occasions. I just have not fully understood what you were saying or why this law change was so important.”
“Most people don’t realize its importance,” said rich dad. “It may be years before people begin to wake up to the ripple effects this law change will have in the future.”
“What is this law change and why was it passed?” I asked.
“Good question,” said rich dad. “First of all, ERISA stands for Employee Retirement Income Security Act. It was the act that made 401(k)s possible. I did not pay much attention to its passage either, but soon my accountants and my attorneys began advising me on changes I needed to make in my businesses. Once that began to happen, I began asking more in-depth questions.”
“And what did you find out?” I asked.
“It seems the act was passed to help protect employees’ retirement money from abuse by their business owners,” said rich dad.
“What kind of abuse?” I asked.
“There have been many kinds of abuses of retirement plans. Even in some large blue-chip companies, pension plans are empty or underfunded. Many times, a company would buy another company, not because of the business, but because they wanted the business’s retirement money. Some of the more responsible businesses had tens of millions of dollars in their employee retirement funds, and that pool of money was often more valuable than the business. So the raiding company would buy the business and bleed the employee retirement fund.”
“They would take over the company just for the retirement money?” Rich dad nodded his head. “But that was not the only abuse. There were more. It was because of these abuses that ERISA was supposedly passed.”
“Why do you say ‘supposedly’?” I asked.
“Well, the act was passed as a benefit for employees, a way to protect employees from these abuses. But as we all know, nothing is only good for only one group of people. The company also benefited from the act, but the benefits to the company were not really mentioned in the press.”
“So how did it benefit the businesses?” I asked.
“Well, now that you’ve had your first business, let me ask you this question: How expensive is an employee retirement plan to the company?”
“You mean Social Security payments plus adding money to the employees’ retirement plan?” I asked.
Rich dad nodded his head, saying, “Yes. How expensive is it?”
“Very expensive,” I replied. “I often wished I could pay my workers more, but the hidden taxes that employees are often not even aware of are so high, I could not afford to pay much more. Every time I gave my employees a raise, the government also got a raise.”
“So while ERISA was passed as a benefit to employees, it was in many ways more of a benefit to the employer. In many cases, the expense of retirement was transferred from the employer to the employee.”
“But doesn’t the employer have to match the amount the employee puts in?” I asked.
“They can if their plan allows it, but the key word is match,” said Mike. “In other words, the dollar amount the employer has to pay is now significantly reduced. That is like taking the cost of your mortgage payment and cutting it in half. Wouldn’t you want to reduce your mortgage payment by half?” Mike was very well versed in this new retirement plan because rich dad put him in charge of understanding it. “And on top of that, many employees elect not to contribute anything, so the employer has nothing to match.”
A Volatile World Economy
“So if the employee does not put any money into his or her fund, the employer pays nothing. The cost of that employee’s retirement just went to zero. Is that why we’re going to have the problem of people without any retirement savings?” I asked.
“That is one of the problems, and it’s a very big problem. But in my opinion, it is not the person who has nothing in their retirement plan who will ultimately cause the biggest problem. The biggest problem will come from those employees who have diligently put money into their retirement accounts. Those who have faithfully put money into their retirement plans will cause the biggest stock-market crash in history.”
In today’s volatile world economy, I recommend that everyone have a Plan B, especially for retirement. As stated earlier, the millionaires next door are probably the next to go. Anyone saving money or counting on the stock market or a traditional pension is walking on the edge of financial disaster.