CCJ 220 Lecture 12: CCJ 220 - Lecture 12

Learn more about Social Security and Medicare reform (to improve financial strength of the programs) or solvency through Internet exploration. Find an article or resource related to one of these topics. Attach the article and write a brief summary (300-400 words) of what you found. Summarize the Article.

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U.S. Social Security reform: the clock is ticking

Clocks are seen during the performance "tck tck tck" by Global Campaign for Climate Action at the Barcelona Climate Change Talks, November 4, 2009. REUTERS/Albert Gea

CHICAGO (Reuters) - Can you count on your Social Security benefits when retirement rolls around?

Most Americans worry about this - partly due to the nonsense they hear from political opponents of Social Security and ill-informed media. You will hear that the program is bankrupt, its reserves are nothing but a bunch of IOUs, or that Social Security is a Ponzi scheme.

All of those claims are false, but there is one good reason for concern. Social Security faces a long-term financial imbalance that would force sharp benefit cuts in 2034 unless the government makes changes. The problem stems from falling fertility rates and labor force growth - which reduces collection of payroll taxes that fund the system - and also from the retirement of baby boomers, which increases benefit costs.

Absent reform, Social Security could continue to pay roughly 75 percent of promised benefits. The cuts would mean that the typical 65-year-old worker could expect Social Security to replace 27 percent of pre-retirement income, down from 36 percent today, according to the Center for Retirement Research at Boston College.

No surprise, then, that only 37 percent of workers are “very or somewhat confident” that Social Security will be able to maintain current benefit levels in the future, according to survey research by the Employee Benefit Research Institute (EBRI) - although confidence is much higher among older workers and retirees.

From a math standpoint, potential solutions to the problem are straightforward. The cuts can be avoided through increased revenue, benefit reductions or some combination of the two. But the politics are another matter.

Republicans are far from holding a unified position on the issue. For example, U.S. Representative Sam Johnson, a Texas Republican who chairs the House Ways and Means subcommittee on Social Security, has proposed legislation containing two significant benefit cuts: gradually raising full retirement ages to 69 by 2030, and using a less generous annual cost-of-living adjustment formula known as the chained CPI.

Meanwhile, President Donald Trump has so far held to his campaign promise of opposing cuts. He has suggested that economic growth will solve the problem by stimulating wage growth and payroll tax collections - a position most economists dismiss as unrealistic.

REPUBLICAN ENTHUSIASM LACKING

The last major Republican reform proposal dates back to the George W. Bush administration, which proposed shifting the program to personal savings accounts - an idea that aroused Republican passion but that went down in flames.

“That was an idea that got people excited, but there hasn’t been much enthusiasm for Social Security reform among Republicans since then,” said Andrew Biggs, resident scholar at the conservative American Enterprise Institute. Biggs worked on Social Security reform as an associate director of the White House National Economic Council.

Meanwhile, Democrats are in no mood to work with the Trump administration on anything that forces a compromise on their core values - and they have shifted significantly to the left on Social Security reform. Representative John Larson has introduced legislation that would not only restore trust fund balance but expand benefits. That is by far the best approach, since roughly half of all households have saved less than $25,000, according to EBRI. Larson’s bill is cosponsored by more than 80 percent of the Democratic House caucus - more than any previous expansion bill.

The bill would increase benefits by 2 percent across the board, shift to a more generous annual cost-of-living adjustment that reflects spending by seniors and set a new minimum benefit at 25 percent above the poverty line. It also would cut taxes for millions of retirees by boosting significantly the threshold for taxation of benefits.

The plan raises revenue by gradually increasing the payroll tax rates that fund the program. The rate hikes would begin in 2019, and by 2042, workers and employers would pay 7.4 percent each, instead of the current 6.2 percent.

Larson, a Connecticut Democrat, also proposes changes to the payroll tax cap for very wealthy beneficiaries. Currently, payroll tax is collected only on wages up to $127,200; the plan would start collecting taxes again on wages above $400,000. That exempts more income than many earlier expansion plans, which either removed the cap entirely or resumed taxation at $250,000.

The payroll tax cap feature played an important role in boosting support for expansion legislation, according to Max Richtman, CEO of the National Committee to Preserve Social Security and Medicare, a progressive advocacy group that supports the bill. “It brought many of the more conservative Democratic legislators on board,” he said.

Of course, the Larson bill is going nowhere in the Republican-controlled Congress, so Social Security reform will not happen before the 2018 midterm elections at the earliest - and perhaps much later than that. But that does not mean beneficiaries should worry about draconian cuts in 2034.

Even if reform is not achieved by 2034, Biggs thinks the problem likely would be solved at the 11th hour through tax increases - simply because benefit cuts must be enacted and phased in over long periods to give beneficiaries time to adjust.

”If they were going to do this by cutting benefits, it should have been enacted 20 years ago,“ he said. ”If you want to do it by raising taxes you want to wait as long as possible, so that you get to the point where the only solution is to put more money into the program.”

But the uncertainty on Social Security policy will continue to undermine public confidence in the program - and that is worrying. Meanwhile, the clock is ticking.

Read the Thomas article, Squeeze Play, and discuss how long you think the emerging upstart airline carriers in Asia that are featured can continue their competitive role in the face of changing travel patterns and consumer behavior brought on by low cost carriers, the Internet and rising G.D.P.s

IT HARDLY IS NEWS THAT THE EMERGENCE IN THE ASIA/PACIFIC REGION of multinational low-cost carriers modeled on the leading LCCs in North America and Europe has transformed and reinvigorated the inter-Asia travel market. But while most of the attention is focused on the impact these upstarts are having on major network/flag carriers, a less public battle is going on as Asia's niche airlines - SilkAir, Nok Air and Bangkok Airways, for example - find their space being challenged by the low-fare wave as well.

Neither full-service nor LCC, this band of carriers has fulfilled a role somewhat analogous to the holiday and charter airline segment in Europe, albeit on a much smaller scale. Some are standalone entities plying short-haul routes with turboprop and small jet aircraft. Others exist as part of a major airline organization, flying the last leg of a transcontinental journey into an Asia/Pacific vacation destination. The question is how long they can continue in their role in the face of changing travel patterns and consumer behavior brought on by LCCs, the Internet and rising GDPs.

A key year for them is 2015, when Southeast Asia's Open Sky Agreement comes into effect, allowing unlimited flights to all 10 ASEAN members: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. Any protections they enjoy from restrictive bilaterals will disappear and they will be fully exposed to aggressive competition from today's batch of LCCs and future new entrants.

Perhaps Thailand presents the best microcosm of the wider challenges facing niche airlines. When Thai AirAsia was launched in 2004 with the political support of the government, Thai International Airways, itself government-owned, responded by establishing Nok Air, in which it holds a controlling 39% stake. But as so often happens in such situations (think British Airways and Go or Continental Airlines and CALite), Nok Air and its parent were more at war with each other than with the new entrant. While Thai AirAsia has come from nothing to operate a fleet of 19 new Airbus A320s serving 24 domestic and international destinations, Nok Air has just 10 aging Boeing 737-400s and two ATR 72s serving 17 domestic points.

The future for Nok may be a bit rosier. CEO Patee Sarasin told eTN in 2009 that the airline, which at the time was carrying fewer than 2 million passengers a year, had "buried the hatchet" with its owner and the two now had common goals. "It is true that we had difficulties in the past to cooperate as we lacked a common vision," he said. "We are now ready to cooperate again."
Prior to the makeup, Thai was considering selling its interest in Nok or assuming 100% control to make it a more effective competitor to Thai AirAsia, although in actuality a takeover might not have been possible owing to the refusal of other shareholders to sell. Part of the new agreement was a realignment of missions, with Nok shrinking its route network to only serve domestic destinations along with cooperation on schedules, distribution, marketing and loyalty programs.
The impact was immediate: Nok Air's 2010 passenger count was 3.1 million, with $128 million in revenue yielding a $20 million profit, according to data from the Centre for Asia Pacific Aviation. Although these figures are well behind Thai AirAsia, which carried 5.7 million passengers, generating revenues of $402 million and a $92.4 million net profit, they are improved significantly from Nok's 2009 results. For 2011 it is forecasting a further lift of 22% in passengers to 3.8 million and a 47% jump in revenue to $175 million. Growth and fleet renewal are now front and center.
The airline, which operates from Bangkok's old Don Muang Airport, added four new destinations in April. Last year it took over three routes from Thai. Also on the agenda is expansion later this year of the secondary regional network with the addition of four ATR 72-500s leased from Nordic Aviation Capital. It is discussing the lease of seven 737-800s from 2012 as part of a conversion program to phase out its -400 Classics.
With Nok Air and Thai at peace and the former looking after domestic destinations, the parent did a deal last August with Tiger Airways to form Thai Tiger Airways to compete head-to-head with Thai AirAsia on international routes.
Supply Chain
Bangkok Airways' niche strategy is to control as much as possible of the journeys of high-yield tourists brought in via partnerships with Air France, Air Berlin, Etihad Airways and EVA Air. International tourists make up 80% of the airline's business, and while it has shelved plans for long-haul international operations, it is looking at Australia along with a return to Japan and China in the near term. Closer to home, flights to Malaysia are on the agenda for 2012.
BW, whose origin dates back to 1968, has nine A320s and eight ATR 72-500s serving eight domestic and eight regional international destinations. India has become a near-term focus after ASEAN's free trade area agreement with that country in 2010. Operations to Bangalore started in April and Chennai will follow in 2012. Services have been increased to daily to Mumbai, and New Delhi is on the radar.
nterestingly, the carrier has built three airports in Thailand - Samui, opened in 1989, Sukhothai (1996) and Trat (2002). Its hubs are Bangkok and the exotic resort of Koh Samui. A private airline, it carried 2.6 million passengers in 2010 and posted a profit of $23.3 million on revenues of $276.6 million. This year it expects a far more bullish outcome with passenger numbers up 19% to 3.1 million and revenues growing 28.2% to $352 million.
With some upbeat results under its belt, an IPO is on the radar. Late last year, President Puttipong Prasarttong-Osoth told the Bangkok Post that "next year should be an exceptionally good one for us barring any detrimental events such as renewed political turmoil. There's no set timeframe for an IPO, but we're thinking maybe in three years, as we must show continued profitability to meet set prerequisites."
Another Thai carrier, Orient Thai Airlines, which has had mixed fortunes over the years, ordered 12 98-seat Sukhoi Superjets last November, apparently on extremely favorable terms, to better position itself to compete with LCCs and carve out a stronger niche for itself. The small airline has been in the spotlight over alleged safety deficiencies yet has managed to stay aloft. In September 2007 an MD-82 of subsidiary One-Two-Go crashed at Phuket in a storm, killing 89. In July 2008 Orient Thai and its subsidiaries were suspended from flying for 30 days owing to an alleged poor maintenance record, while the EU banned One-Two-Go from flying to Europe (the ban later was lifted). Its 10-aircraft fleet is made up of MD-80s and MD-90s along with 747-300s and -400s that perform domestic services and one international route to Hong Kong plus mainly Hajj charters.
Delivery of the first two Superjets will occur in November with all 12 in service by 2014. They will both replace older types and enable expansion, although that will not involve One-Two-Go, which was shut down by the parent last year.
The flightpath for SilkAir, a wholly owned subsidiary of Singapore Airlines, is brighter, according to Peter Harbison, executive chairman of Sydney-based CAPA. "SilkAir is doing very well as a regional feeder for Singapore Airlines with a premium product," he says. It has 18 A320s and will receive three more this year and a further three by the end of 2013. It serves 31 of 50 short-haul destinations for SIA Group and its average sector length is just 955 km. While this may be short, it does stretch its legs to Chengdu, Chongqing and Kunming in central China as well as Xiamen and Shenzhen north of Hong Kong. India is also a big destination with services to six southern cities.
Harbison believes that SilkAir, which operates from the same terminals as its parent at Changi rather than the LCC terminal, plays a vital role for the overall network as SIA has no single-aisle equipment. It flies to holiday destinations such as Phuket, Penang and Langkawi but also largely has replaced SIA on services to Kuala Lumpur since AirAsia entered the route.
Less clear is whether the dividing line between SilkAir and LCC Tiger Airways, in which SIA Group holds a 34.4% stake, can be maintained. Whether or not SIA has kept the cat on a short leash - both sides deny it - the fact is that Tiger operates just 15 A320s out of Singapore and a further 11 in Australia, although it has 43 on order. Its JV with Thai Airways and its purchase of a 33% stake in Philippines-based SEAir suggests it may be ready to roar.
Back Where It Started
In the birthplace of Asia's LCC movement, Kuala Lumpur, Malaysia Airlines finally is reacting by turning its niche regional airline Firefly into an aggressive low-cost competitor to AirAsia. Firefly, which launched in 2007, operates seven ATR 72s and three 737s and is based at Sultan Abdul Aziz Shah Airport in Subang just 30 min. from downtown Kuala Lumpur as well as having a series of secondary hubs such as Penang. Late last year it announced that it would acquire 30 737-800s over five years and concentrate more on services from Kuala Lumpur International to take on AirAsia. Nonetheless, it has used its downtown location well and operates flights to Singapore seven times daily with ATR 72s and to Penang 11 times daily. In all it serves 19 destinations in Malaysia, Indonesia, Thailand and Singapore.
Is it possible that niche airlines in the region can find a peaceful coexistence with LCCs? Possibly, but the experience in North America, Australia and Europe suggests it will be difficult. Following deregulation, most US charter carriers folded as travelers and tour organizers found fares just as low on the major network airlines. Wardair, a popular Canadian charter carrier, tried to address the problem after Canadian deregulation by entering the scheduled market but could not make the transition. Australia's East West Airlines did not survive deregulation in the 1990s, caught as it was between Ansett and Australian/Qantas and without a clearly defined market.
The steady growth of US LCCs contributed greatly to the demise of Midwest Express (now part of Republic Airways Holdings' Frontier subsidiary). In Europe, the holiday/charter segment has taken its knocks from the likes of Ryanair and easyJet but continues to hold a large share of the market, although nothing like it enjoyed 20 years ago.
The answer, if one exists, is to identify a new market or find a fresh way to serve an existing one, as Allegiant Air has done in the US. With a route network focused on flying from smaller cites to major vacation destinations with very limited frequency and rock-bottom costs, Allegiant avoids the pitfalls of trying to compete head-on with either the network or LCC segment. Time will tell if such opportunities exist in Asia.

1. Briefly summarize the key point of the article, but DO NOT include any direct text from the article (i.e., don't quote or copy from the article), tell me in YOUR OWN words. This should be brief.

2. Explain how your article is connected to business

3. Explain what other businesses, or your employer, could learn from the key point(s) in this article.

Americans Keep Crushing It With Their 401(k)s

The stock market is fueling all-time highs in retirement account balances, with the average IRA breaking into the six figures.

It’s happened again: Retirement savings account balances have hit all-time highs. A string of record 401(k) and IRA account totals now stretches across three consecutive quarters, according to second-quarter data from Fidelity Investments. The data covers 22,155 companies and 15.1 million 401(k) plan participants, as well as 8.8 million IRA accounts. The performance reflects the impressive display of endurance training by a stock market that just keeps on running, as well as increased employee and employer contributions to retirement accounts. The average 401(k) account balance stands at $97,700 as of June 30. That’s a 9.6 percent gain from the $89,100 average of a year ago, and a big leap from the $73,300 average of five years ago. Average IRA totals, meanwhile, rose to $100,200 from $89,600 a year ago and $73,100 in 2012. For the 12 months ending June 30, market gains accounted for 72 percent of the rise in retirement account balances at Fidelity. Over that same period, the Standard & Poor’s 500 had a total return of 17.9 percent. Employees put a record average of $5,850 into their 401(k)s over the past 12 months, a 4 percent increase from a year ago. Ninety-five percent of active employees contribute to their 401(k)s, and many defer enough of their pre-tax salary to get the average company match, which is 4.5 percent. But about 21 percent of employees can’t, or aren’t, contributing enough to get the full match. Many are likely to have been auto-enrolled into their 401(k) at a salary deferral rate of 3 percent, and left it there. The bit of good news is that many savers don’t have that far to go before getting the full match—53 percent are 1 or 2 percentage points away. Competing financial priorities may mean saving another 1 or 2 percent of salary isn’t feasible until a raise or bonus comes into play. But if extra cash flow exists, a relatively small increase in savings rates can make a big difference over a long career. One way companies are trying to get employees to save more is by rejiggering the company match, said Jeanne Thompson, a senior vice president at Fidelity. For example, instead of giving a 100 percent match on the first three percent of salary put into the plan, a company may match 50 percent of contributions up to 6 percent, so employees need to contribute 6 percent to get the full match. In addition to tracking accounts quarterly, Fidelity looks at workers with long histories in 401(k) accounts. Workers with 10 straight years in the same 401(k) also enjoyed a record quarter, with the average balance rising to $266,100. Ten years ago, the average was about a third of that amount, $78,800. Market action is responsible for 53 percent of the tripling in these 10-year plan participant balances since 2007, and the rest came from employee and employer contributions. The long run-up in stocks has Fidelity urging retirement savers to make sure they don’t have too much of their nest egg in equities. That’s not an issue for all generations of savers—two-thirds of millennials in Fidelity’s database are 100 percent invested in target-date funds (TDFs). (The funds automatically adjust asset allocations over time, based on your years to retirement; Fidelity assumes you’ll retire at age 67.) Millennial accounts hold 87.4 percent in stocks on average. That’s where they should be, according to the equity allocation in a Fidelity TDF for someone who wants to retire in about 30 years. The generation with the largest chunk of savers holding equity stakes at least 10 percentage points above Fidelity’s recommended allocation for their age is baby boomers, coming in at 26 percent. The average equity stake for boomers is 68.8 percent. For someone who wants to retire in 10 years—say a 55-year-old planning to retire in 2027—the recommendation is 64 percent in stocks. So the average equity stake isn’t far off, but there are some extremely equity-heavy portfolios out there. Boomers may also be very tech-heavy in their retirement portfolios, since they are less likely to be in widely diversified target-date funds than younger workers. Some of the most widely held mutual funds in 401(k) plans, including the $116.1 billion Fidelity Contrafund and the $39.3 billion Fidelity Growth Company, have large tech stakes and big chunks of assets concentrated in their top five holdings. Contrafund’s tech stake was just over 37 percent as of June 30, and the Growth Company held almost 40 percent in tech. The top five holdings in Contrafund make up 23.5 percent of the fund; it was 24 percent for Growth Company. It’s been a great strategy so far. The dilemma now, at least for boomers nearing retirement, is when and if to take some money off the equity table. “An element of caution needs to be built into a portfolio,” said Brian Singer, head of dynamic asset allocation strategies at William Blair and Co., “but the market is making it so expensive to put that caution into place.”