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Gifts to the Rich

Abolishing traditional defined benefit retirement plans has been a huge gift to wealthy investors.  In the old days, retirement funds invested in bonds, which returned something ike 4% annually, and which over a working life would provide the bulk of the funds needed for retiring employees.  Now most companies offer 401(k) plans, in which the employee has to invest part of his salary, and the company may or may not match his contributions.

Companies could hire experts to decide how much they needed to invest and how to invest it.  They weren’t always right, but they had a better chance of being right than the average worker.  Investment companies can help with 401(k) plans, but often their fees are so high that they eat up a significant part of the earnings.

But the huge benefit for big investors is the influx of new money into the stock market.  This is partly due to low interest rates, which make it impossible to invest in bonds, but it is also due to the fact that small investors need rapid, big returns to cover their retirement.  This is often possible in the stock market, but it is the exception, not the rule.  In the meantime, the small investors create a huge pool of money for the rich to play in.  It’s somewhat like bringing thousands of players into a poker game and creating a gigantic pot.  One of the small investors might theoretically win, but more likely one of the rich players who can keep anteing up will take the big pot.  The 401(k)s mean that there is more and more money flowing into the market, funding IPOs and bidding up stock prices.

Low interest rates mean that the wealthy can borrow for almost nothing to bet on the market, and with all the help of quants, hedge funds, etc., are more likely to win big.  The 401(k)s and IRAs will work out well mainly for the wealthy, like Mitt Romney, who had $102 million in an IRA.  Romney hates the low income takers from the Federal Government, but because of the tax breaks he gets, the government is shoveling money to Romney with both hands.  If he had to pay 40% tax on $100 million, that would be $40 million; so that is more or less what the government has given him, a lot more than if he collected food stamps.  Meanwhile the average investor in an IRA will save a few thousand in taxes.

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