How Taxes, Inflation, Debt, and Retirement Fund Schemes Keep the Middle Class and Poor… Poorer

For decades, millions of hardworking people across Kenya and the wider world have asked themselves the same haunting question: “Why do I work so hard, yet I never seem to get ahead?”

The truth is sobering. While personal discipline, hard work, and smart decisions matter, there are structural forces in the economy that keep the middle class and the poor trapped in financial struggle. Four of the biggest culprits are:

• Taxes

• Inflation

• Debt

• Retirement Fund Schemes

In this article, I will break down how each one works against you, how they silently erode your wealth, and most importantly, what you can do to protect yourself and eventually rise above them.

1. Taxes: The Silent Salary Killer

Taxes are necessary for any government to provide infrastructure, healthcare, security, and education. But for the average Kenyan worker, taxes can feel like a punishment for productivity.

How Taxes Trap the Middle Class and Poor

• PAYE (Pay-As-You-Earn): This comes straight out of your salary before you even touch your money. The more you earn, the higher the rate. For salaried workers, this is unavoidable.

• Consumption Taxes: Every loaf of bread, every litre of fuel, every data bundle you buy is taxed through VAT or excise duty.

• Indirect Levies: Beyond VAT, levies on fuel, housing, and service fees add hidden costs that eat into your budget.

For the middle class, taxes take away disposable income. For the poor, indirect taxes hurt the most because they spend nearly 100% of their income on consumption.

Meanwhile, wealthy individuals often have access to tax planning tools—trusts, offshore accounts, and investment vehicles—that minimize their tax burden. That means the system effectively penalizes those who earn wages but do not own assets.

The Result

Taxes reduce your take-home pay, leaving you with less to save or invest. The poor and middle class remain trapped in a cycle of “earn → pay tax → spend → repeat,” with little left to build wealth.

2. Inflation: The Hidden Thief

Inflation is the gradual rise in prices of goods and services. On the surface, it looks harmless—just a few shillings added to bread, milk, or fuel. But over time, inflation erodes the purchasing power of money.

Example

• In 2013, Ksh 100 could buy a full loaf of bread, some milk, and still leave you with change.

• In 2025, Ksh 100 might only buy the bread, with nothing left over.

If your salary does not rise at the same pace as inflation, you are effectively getting poorer each year, even if your nominal pay remains the same.

Why the Poor and Middle Class Lose

• They hold most of their money in cash or bank savings accounts.

• Typical bank interest rates (3–5%) are lower than inflation rates (7–10%).

• That means money sitting in the bank is losing value every day.

The wealthy, however, fight inflation by investing in assets that grow faster than prices: real estate, shares, treasury bonds, and businesses. These appreciate while inflation eats away at cash.

3. Debt: The Wealth Transfer Tool

Debt is one of the greatest wealth transfer mechanisms in the modern world. It takes money from the poor and gives it to the rich.

Bad Debt vs. Good Debt

• Bad Debt: Credit card bills, digital loans, payday loans, hire-purchase for electronics, or borrowing for parties and consumption. These loans carry double-digit interest rates that make lenders rich while trapping borrowers in endless repayments.

• Good Debt: Mortgages, student loans (when wisely chosen), or business loans that fund income-generating activities. Good debt creates wealth when managed carefully.

Why the Poor and Middle Class Lose

• Many turn to loans to “fill gaps” in daily living. Salaries run out before month-end, so credit bridges the gap.

• Each loan comes with high interest, and soon, a worker is paying 20–30% of their income in repayments.

• Instead of money compounding for them, it compounds against them.

The wealthy, on the other hand, often use debt to acquire appreciating assets. They borrow at 10% to invest in something that grows at 20%—and they pocket the difference.

4. Retirement Fund Schemes: The False Promise

On paper, retirement funds are designed to protect you in old age. In Kenya, the National Social Security Fund (NSSF) and other pension schemes exist for this purpose. But in practice, many schemes fail to deliver meaningful security, especially for low- and middle-income earners.

The Problems

• Compulsory Deductions: Workers are forced to contribute, even when struggling with basic needs. This reduces take-home pay.

• Too Small to Matter: For decades, contribution rates were too low (Sh200 per month), meaning workers retired with peanuts.

• Reforms Backfiring: Recent hikes in NSSF deductions (up to Sh4,320 monthly) have shrunk take-home pay, leading workers to abandon voluntary contributions. Overall savings have collapsed by nearly 50%.

• Exclusivity: High deductions mean only elite, well-paid workers can comfortably contribute, leaving out millions in the informal sector.

The Result

Instead of boosting retirement security, pension schemes risk becoming elite clubs that lock out the majority. Workers contribute for decades but retire with amounts too small to sustain them.

The Cycle of Poverty Reinforced

Put together, here’s what happens:

1. You earn a salary → Government takes taxes.

2. Your costs rise each year → Inflation erodes your money.

3. You borrow to survive → Debt drains future income through interest.

4. You contribute to retirement funds → But reforms cut take-home pay and benefits are minimal.

This cycle ensures that the poor stay poor and the middle class never truly build wealth.

How to Break Free: The Escape Plan

Escaping this cycle requires intentional, disciplined steps. Here’s what I advise as a financial expert:

1. Reduce Your Tax Burden Legally

• Use SACCOs and pension schemes that offer tax relief.

• Claim allowable deductions.

• Diversify into investments with favorable tax treatment (e.g., government bonds).

2. Beat Inflation

• Invest in assets that outpace inflation: real estate, shares, unit trusts, treasury bonds.

• Avoid letting money sit idle in low-interest accounts.

3. Use Debt Strategically

• Cut out consumer debt.

• If you borrow, borrow for assets or business, not for consumption.

• Build an emergency fund to reduce dependence on short-term loans.

4. Build Independent Retirement Security

• Do not rely solely on NSSF or compulsory schemes.

• Open personal retirement accounts (PRSAs, mutual funds, ETFs).

• Invest in cash-flowing assets—like rentals, dividend-paying stocks, or businesses.

5. Shift Mindset From Consumption to Ownership

• Instead of upgrading cars, phones, or lifestyle with every salary increase, channel at least 50% of pay rises into investments.

• Assets put money in your pocket; liabilities take money out. Focus on acquiring assets.

Conclusion: A Call to Action

Taxes, inflation, debt, and flawed retirement schemes are designed in ways that keep the poor and middle class running in circles. But awareness is the first step to freedom. By understanding these forces, you can take deliberate action: reduce tax exposure legally, invest to beat inflation, use debt wisely, and build independent retirement strategies.

Wealth is not built by working harder alone—it is built by working smarter with your money. The rich have mastered this; it’s time for the middle class and poor to do the same.

The system may be stacked against you, but you can still rise above it. With discipline, strategy, and the right mindset, you can break free from the cycle and start building a future of true financial independence.