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The Cause of the Problem
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ERISA will not be the cause of the coming stock market crash. ERISA, Enron, and the coming giant crash are really only the symptoms of a much deeper problem. This chapter is about the problems behind the problem and how we can begin once and for all to solve them. In this chapter we get to the real reason behind rich dad's prophecy.

Social Security and Medicare are taking on water as well. The Clinton ad ministration's fiscal 2000 budget report stated, “Government trust funds do not consist of real economic assets that can be used in the future to fund benefits.” In other words, the government is finally admitting that there really is no Social Security trust fund. It is a figment of our imagination. Is So cial Security merely a modified Ponzi scheme?

In America today, every employee looks at their pay stub and they see

7.65 percent of their pay, matched by the employer's 7.65 percent, for a total of 15.3 percent, going to Social Security and Medicare. Every employee is hoping that after retirement they will be on the receiving end. They can be if there are enough employees still at the front door turning in their money. The problem is, because people are living longer, there are more and more retired people waiting at the back door. Is this a scheme that works only as long as there are more people at the front door than the back door?

For decades, the federal government has borrowed and spent the Social Security surplus—the difference between Social Security's tax revenues and outlays. The government replaces the money it borrows with IOUs in the form of U.S. Treasury bonds. In recent years, many critics began to say that the Social Security system was a shell game, that there was nothing in the trust fund. In return, government bureaucrats criticized the critics, denying that there was a problem. In the year 2000, when the Clinton administration came clean and published that statement, the statement fundamentally saying there really is no trust fund, it marked the first time that the government finally acknowledged there is a problem. Does the problem sound similar to the problems with Enron?

The Social Security system worked fine when it began in the mid-1930s when there were forty-two workers for every one Social Security recipient. In the year 2000, the number was 3.4 workers per one recipient. By 2016, according to the commission's report, Social Security will collect less money in tax revenues than it pays out. In other words there will be too many people at the back door.

If you remember from an earlier chapter, 2016 is the same year that the first of the baby-boom generation turns seventy, a jump of 700,000 people turning seventy in that year alone, and those statistics do not include the numbers they expect to die before seventy, so that means 700,000 living people . . . and the number of people over seventy years of age will continue to increase with each subsequent year. That is what I call a perfect storm brewing. In 2002, politicians are proposing that younger workers be allowed to invest money either in a personal savings account or the stock market. If this law passes, that will mean even less money entering the system for the older retirees. If this law passes, that means Social Security begins to run at a negative well before 2016.

In 1979, I did not fully understand why rich dad was so concerned about the future. I wondered why a rich man would have such a doom and gloom prophecy. I wondered why he would care. Although I did not fully understand his logic, I trusted him enough to continue building my ark. That is why I did not take the sales manager's job, or any other job, even though the pay and benefits were great. Instead of taking the job, I decided to stand and face the real world early in life rather than face the real world later in life. By 1994, Kim and I were financially free. We had built an ark that kept us afloat. Our ark did well when the stock market went up in the late 1990s and the ark kept us afloat even as the market crashed in March of 2000; in fact we made

even more money as the market crashed. Today, because of my own per sonal experiences on what it takes to build a personal ark, I better under stand why rich dad was so concerned about the future . . . a future he knew his son and I would see.

Pushing the Problem Forward

Rich dad saw that the real cause for concern was that the issue of personal financial survival after retirement was being pushed forward. That is why he repeatedly said, “ERISA is my generation passing on its problem to your generation.”

One of the more important lessons rich dad taught his son and me was the difference between a businessperson and a government bureaucrat. Rich dad said, “A businessperson is a person who solves financial problems. If they do not solve their financial problems, they are out of business. If a government bureaucrat cannot solve a problem, a bureaucrat can afford to push the problem forward.”

Rich dad was not being critical of government; he was just being observant. He said, “Governments solve many problems for the good of society. It is the government that uses our tax dollars to provide military defense, fight fires, provide police protection, build roads, provide schools, and provide welfare for the needy. But there are problems that government cannot solve and when those problems are pushed forward they often become bigger and bigger problems. This problem of financial survival once a person's working years are over is a monster of a problem that is growing bigger. The problem constantly grows bigger because too many people expect the government to solve what is really a personal financial problem.”

Rich dad was worried that people were never taught how to build their own ark. Over the years, they have been taught to depend on a company and the government to provide that ark for them. As the problem became too complex to solve, laws were passed to pass the expense of retirement on to the next generation. In other words Social Security and ERISA pass the expense of the care of one generation on to future generations.

Then in 1996, a new DC investment plan entered the market. It is the Roth IRA, named after the senator who championed it. The Roth IRA was a new DC plan designed only for the middle class. If you are rich, you are not allowed to have one.

Soon after the Roth IRA came out, Diane Kennedy, my tax advisor and author of Loopholes of the Rich, called me. She was very concerned about this new DC plan, which allows its owner to receive tax free payouts after retirement for funds taxed before entering the plan. The Roth IRA was once again pushing the problem forward, this time from the baby-boom generation to the future generations.

According to Diane, the Roth IRA was primarily created to collect more taxes. She said, “If you notice there was a surplus of money in the budget soon after the Roth IRA was passed. I suspect the Clinton administration passed this law because they needed more taxes and wanted to create the illusion that they were doing a good job. The problem is, when the baby boomers begin to retire, it is their kids who will have to pay those taxes to make up for the future budget shortfalls.” In other words, the problem has been passed forward again.

Almost immediately, the Roth IRA was the darling of the middle class. They loved the idea of paying taxes now but being allowed to pull out the gains tax free in the future. Because the market was going up in 1996, many people saw this Roth IRA as a gift from heaven. Money, greed, a rising mar ket, and the new Roth IRA were all these people needed. Money began pour ing into these new IRAs and directly into an already overheated stock market. The market took off like a rocket ship.

One of the ways the government made more money was that many people stopped contributing to their 401(k) DC plans and shifted money to their new Roth IRA. That meant the taxman collected more money from the middle class, since only after-tax dollars are allowed to go into a Roth IRA. Explaining a little further for those that might still not be clear on the difference, the traditional 401(k) DC plan, allows the employee and employer to put untaxed dollars into the plan. That means the taxman gets no revenue from those dollars. The taxman then has to wait till the employee retires before the government can begin collecting taxes. By creating the Roth IRA, many people stopped contributing to their company's 401(k) plan, and put the money instead into this new Roth IRA. When this happened, the government got paid today but not tomorrow. The problem is tomorrow. In the future, there will be fewer taxes to be collected. Again, this will be a major problem down the road.

But the Roth IRA did one more thing. It inspired many people without a retirement plan to open one. Not only were there many new people enter ing the market via their new Roth IRAs, money was also flowing out of savings accounts and some people were even borrowing money to invest. With so much money pouring into the market the market continued its climb. People began to say, “This time it's different. It's the new economy.” By 1998 millions of noninvestors who got lucky in the market the year before and who now thought they were investors suddenly began an investing frenzy just because fear and greed had become the same.

People even quit their jobs to become investment advisors. Little old retired ladies formed an investment club, wrote a book, and began handing out investment advice. Unfortunately, it was later disclosed that the little old ladies really hadn't done as well as they thought they had with their investments. Nevertheless, they did inspire others to form investment clubs all across the country, which I think is a very good idea. Investment expos sprung up and they were packed with thousands of people who had been bitten by the bug. By 1999 shoeshine boys and taxi drivers were handing out hot stock tips and the stock market went straight on up to all-new highs. Between 1996 and 2000 many people who had no business investing began pouring money they could not afford to lose into the market . . . a mania was on. Greed and fear had become one . . . twenty-five years after the passage of ERISA. The foxes were grinning as they watched the chickens cluck with excitement. The foxes knew it was time to take a little of their winnings off the table . . . but not all . . . just a little. The foxes know there is still one more run to go.

In March of 2000 the party came to an end . . . but of course, many peo ple did not want to believe it. Yet slowly but surely, the reality of the real world sank in. The opening paragraph of the lead story from the February 25, 2002, Business Week says it all:

It's 2 a.m., and Jim Tucci is staring wide-eyed at the ceiling—another sleepless night. Instead of counting sheep, he's anxiously tallying up how much he has lost in the stock market. Half of his $400,000 nest egg, he figures, has evaporated in just two years. Forget the retirement property on the Gulf coast. Forget the long-planned trip to Italy with his wife. Tucci, a 60-year-old sales manager at a voice recording company in Boston, admits he blew a wad on speculative tech stock during the Internet bubble. But a year ago, he dove for safety in blue-chip stocks like IBM, Merrill Lynch, General Motors and Delta Airlines. Now 40% of that is gone. Tucci feels suckered. “I'm para lyzed, I can't sell because I'd take such a big loss. I'm sure as heck not going to buy anything. And even if I were, whom would I listen to for advice? No one seems to give off a whiff of honesty about any of this stuff. These days, I just pray a lot.”

The article goes on:

Some 100 million investors—about half of all adult Americans—can relate to that. They're the new Investor Class that has emerged over the past decade. Predominantly middle-class, suburban baby boomers, they bought into the idea that stocks could make them richer. They exulted during the long bull market of the 1990s. But they've lost $5 trillion, or 30% of their stock wealth since the spring of 2000, when the dot-com implosion launched the second-worst bear market since World War II. It wasn't Monopoly money: It was money earmarked for retirement, for college tuition, for medical bills.

The Problem Gets Bigger

The concern with pushing problems forward, rather than solving them, is that the problem only gets worse. When the Enron scandal broke, millions of people got their first glimpse at how big this problem can be . . . and personally devastating . . . especially for older workers, workers who have had their 401(k) wiped out, who know that Social Security and Medicare are going broke, and their kids are not much better off than they are. Instead of retirement being a dream, the retirement has become a nightmare.

Rich dad explained to me how this problem came to be: “When America became a world power back in the early 1900s, millions of farm hands began to move off the farm and into the city for a high paying job in the new facto ries. Soon our factories were booming, but a new problem was created. The problem of what to do with older workers.”

“That's why during the Depression the Social Security Act was passed,” I said, remembering that Social Security began in the 1930s. “I'll bet it made a lot of older workers happy.”

“It did,” rich dad agreed. “And it still does today. But when World War II broke out, the factories picked up and the boom in America continued right on through even after the war ended. Because there was a boom on, many unions began demanding that their workers receive a pension after retiring. In order to keep the union leaders happy, corporate management agreed and DB pension plans began to grow.”

“But the problem persists,” I said. “The problem of how a person sur vives once they are no longer able to work.”

“That is correct,” said rich dad. “That is the problem behind the problem. That is, how does a person survive once they are no longer able to work? This is the problem that led to Social Security, DB pension plans, and ERISA.”

“That's the problem that needs to be solved,” I said.

Rich dad just nodded his head and said, “The World War I generation solved its problem by passing on its expenses via government legislation to the World War II generation. The World War II generation passed its ex penses on to your generation with pension reform.”

“So the government passes the problem on rather than solve it,” I said. “And that is the basis of your prophecy.”

Rich dad looked at me silently and solemnly. He could tell I was begin ning to understand why the problem will get worse.

I sat quietly for a while, letting the idea sink in. And as I sat there, I began to recall speeches by famous politicians saying words that made people happy, making promises that would keep them hopeful. Snapping out of my silence I said, “So that is why you say there will be a giant stock market crash. The problem is not the stock market. The problem is the original problem has been passed on rather than solved . . . and someday soon, the problem will become too big. It's all going to come tumbling down like a house of cards.”

“That's correct,” said rich dad. “We now have too many people who have come to expect the government to solve their problems. And politicians, in their desire to win votes, will promise to solve those problems. But of course, we know that a politician will do and say anything to remain popular, be liked, and get reelected. I don't blame them. If they told people the truth, they would be thrown out of office. So the problem grows, the government gets bigger, and the taxes have to get higher.”

The Rise and Fall of the Roman Empire

All through my years growing up with rich dad, he encouraged me to study the history of the rise and fall of great empires. One of the empires he had me study was the Roman Empire. During one of these study sessions rich dad said, “The Roman Empire had great technology for conquering and taxing people so they were able to create a vast empire. Their difficulties began as people moved off the conquered lands and into cities such as Rome. As the city of Rome grew, the leaders became concerned that the urban mobs would revolt because they had no jobs, shelter, or food. So the Romans fed the people and created great distractions such as the Colosseum to entertain the masses. Soon Rome became a great city of people who expected to be entertained and fed.”

“So Rome became a welfare state?” I asked.

“More than a welfare state . . .” said rich dad, “it became a large government bureaucracy. Instead of solving problems, they created more problems. It was also a very litigious state. There were more lawsuits per capita than even in America today, because more and more people wanted to blame someone else for their problems, rather than solve their own problems. As a result, the problems only increased. And the more problems they created the more bu-reaucrats were needed. So as the problem got bigger, so did the government.”

“So how did they afford it all and keep control?” I asked.

“Well for one thing they had a strong army. As I said, they knew how to conquer. Conquering people was their technology. In order to pay for this form of mob control, the Romans increased taxes on the working class throughout the empire. Soon the taxes got so high that workers began leav ing the land and moving to the cities because life on the land made no sense. All their work was taxed so why not move to where food and entertainment were inexpensive or even free.”

“So the problem got worse, not better,” I said.

“Well, it was one of the many problems that was getting worse,” said rich dad. “As I said, the workers were leaving the land. That meant food produc tion as well as tax collection was beginning to decline as more and more workers moved into the cities.”

“So how did they solve that problem?” I asked.

“The same way any military-based conquering nation solves its problems. Rome passed a law making it illegal for a worker to leave the land. In other words the workers were now bound to the land. If the worker left, the law al lowed the government to punish the relatives.”

“And that did not solve the problem?” I asked.

“No . . . and because the Romans could not solve their problems, the great Roman Empire began its decline,” said rich dad. In closing he said, “If we do not solve our problems, the same thing will happen to America.”

In 2001, a new president took office in America. Just before he took of fice, there was a stock market crash, which led to a recession. At the time, we had a surplus in the budget, so to solve the problem, the Bush administra tion immediately cut taxes and the Federal Reserve Board repeatedly re duced interest rates in hopes of spurring the economy.

The Next Argentina?

Many Americans hate being compared to Japan. Many economic scholars in America say that what is going on in Japan will not go on in America. I tend to agree. If anything, Argentina is a better example of what might happen to America in the future. Argentina, only a few years ago, was a rich industrial powerhouse with a fantastic standard of living. It was a rich land, a favorite place for many Europeans. In many ways it was more European than South American. But in just a few years, this very rich country became a poor, debtridden, bankrupt nation with a weak currency. Money has left and so have the rich. Taxes are high and the currency has collapsed. Corruption is everywhere. If the problems are not solved, real anarchy could erupt.

Could that happen to America in twenty to thirty years? Most Americans think not. Unfortunately too many Americans have come to expect that government will solve their problems, and I am afraid rather than solve the problems, an older America will vote for more government and higher taxes. With Social Security the most popular act ever passed, I am afraid that those who depend upon Social Security (soon to be a major voting bloc) will vote once again that the younger workers take care of them. If that happens, taxes will skyrocket. While it took hundreds of years for the Roman Empire to finally collapse, with today's speed of money transfers, the great American Empire could fall pretty fast.

Rich dad noted that one of the reasons the Roman Empire fell was because the Romans never evolved from a basic technology of conquering and taxing. If they had evolved, their empire might have gone on for centuries.

Unfortunately, great empires seem to forget that they need to evolve. Spain was also a great nation that grew by taking and not creating. So it too fell from greatness after attaining great power and great wealth. It fell from power because it did not evolve.

Hopefully this won't happen to America if Americans are willing to face the problem honestly and allow people and business to solve the problem once and for all. In his speech in February 2002, Alan Greenspan, chairman of the Federal Reserve Board, called for the need for financial literacy. He too spoke of the need to evolve. He said it was important that all our children learn financial literacy in our schools if we are to evolve as a civilization and continue to be a world power.

Rich dad would agree wholeheartedly with Alan Greenspan. In fact, in many ways they sound alike. Rich dad often said, “The government tries to solve the problem of poor people by giving them money. Giving poor people money only creates more poor people.” He also often said, “If we don't improve our children's financial education, they will not be able to solve the financial problems we have passed forward. If we do not solve these prob lems, the American Empire will come to an end. It's up to your generation to solve this problem before this happens.”

We have a number of years to solve the problem, so I recommend we be gin solving it, rather than pushing the problem forward. The problem is too big to be pushed forward anymore. This book is meant to be a call to action. The baby boomers still have time to solve this problem if we will address the problem honestly and truthfully.

Rich dad was very optimistic about America. He said, “Although America is a military power, it does not use its military power to take. America uses its military to protect its lines of commerce as well as keep order in the world. America is also a business power and a business power has the ability to cre ate rather than take.” He would say, “It's time to use our business power to create solutions to this very big problem of how a person survives once their working days are over. If we as a nation solve this problem, America can evolve into an even greater world power.”

If we do not solve this problem, we contribute to the approaching per fect storm of our financial lives.

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