What's wrong with the reward of making new characters being the ability to play those characters?
Quite frankly, I think what's wrong is the fact that we're penalized for creating new characters AND the fact that there is no option to go back to the beginning. Our choices are:
1) Stay at current level and lose a magic item OR
2) Keep all your magic items, but lose a level (which in a sense still makes you lose a magic item, since you're a level lower =P)
Being able to start back from the beginning is a great option for those who have taken their characters as far as they want to take them. As mentioned by several posts above, it's not really possible to "feed" another PC by creating new ones since the returns on lower level characters won't give much to the new character (as long as the PC credits are worth an amount based on the level of the PC retired and NOT on the PC that they are being used on). This way, if you retire a high lvl PC to drop back to 1, one of your Low level/Mid Level PCs gets a nice little boost and you're not really gaining an advantage over anyone else.
Now, you mentioned a money hole because of the XP jump. This is easily correctable if we use the LEB system of DM credits, which after 10 credits gives 1/5th level of gold. This could be pro-rated for those who do not have all 10 credits to spend at once.
The only question that needs filled as of now (for me) is this: DM credits are based on time spend DMing. How would we calculate the Player credits one would get for retiring their PC and starting at level 1?