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Cato Daily Dispatch for December 27, 2004

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Chilean Pension System Demonstrates Benefits of Private Accounts
Airlines Poised for More Financial Problems
Yushchenko Declares Victory in Ukraine

Chilean Pension System Demonstrates Benefits of Private Accounts

"Pretty much every country that has a government-backed retirement system is in deep trouble. But the U.S. is almost alone in not having any plans, no matter how vague, to head off the crisis," according to an editorial in the Wall Street Journal.

"Chile runs the most advanced and oldest of the reformed plans. ... When it was established in 1980, workers were allowed to opt out of the government pension plan and contribute 10 percent of pre-tax wages to personal, private accounts. (Workers can also voluntarily contribute up to an additional 10 percent.) The money in these private accounts grows tax free; it is taxed only when retirement is taken and funds are withdrawn. Workers can choose among several private companies to manage their accounts."

In "Empowering Workers: The Privatization Of Social Security in Chile," José Piñera, co-chairman of Cato's Project on Social Security Choice and architect of Chile's plan, writes: "It is not surprising that the [Pension Savings Accounts] system in Chile has proven so popular and has helped promote social and economic stability. Workers appreciate the fairness of the system and they have obtained through their pension accounts a direct and visible stake in the economy. Since the private pension funds own a sizable fraction of the stocks of the biggest companies of Chile, workers are actually investors in the country's fortunes.

"When the PSAs were inaugurated in Chile in 1981, workers were given the choice of entering the new system or remaining in the old one. Half a million Chilean workers (one fourth of the eligible workforce) chose the new system by joining in the first month of operation alone -- far more than the 50,000 that had been expected. Today, more than 90 percent of Chilean workers who had been under the old system are in the new system."

Airlines Poised for More Financial Problems

"With the six big airlines expected to lose another $5.5 billion this year, every one of them -- American, United, Delta, Continental, Northwest and US Airways -- has announced plans for deeper cuts in 2005. All told, they will reach $7.5 billion in spending and at least 20,000 jobs," the New York Times reports.

"For passengers, the irreversible retrenchment by the airline industry, which has shrunk by a quarter since the start of the decade, has meant the loss of food service, a reduction in routes, flight delays, lost baggage and other headaches."

In "Airline Deregulation: The Unfinished Revolution," Robert W. Poole Jr. and Viggo Butler, respectively, chairman of the Reason Foundation and chairman of United Airports Limited, write: "Any return to a regulatory system that has the government micromanaging routes and services would be misguided. Such a 'solution' would do little to improve air travel and would cause significant harm to consumers. Despite the criticisms, airline deregulation has provided -- and continues to provide -- enormous benefits to the average traveler. ... American cities have been offered much greater air travel access, thanks to an aviation marketplace in which airlines are free to provide service when and where demand exists, without having to seek permission from central planners. Millions of Americans began to fly for the first time in their lives. Airline deregulation democratized air travel in America."

Yushchenko Declares Victory in Ukraine

"West-leaning opposition leader Viktor Yushchenko looks certain to become Ukraine's next president, bringing with him the promise to end rampant graft and to reform the ex-Soviet state's damaged economy," Reuters reports.

"Yushchenko wants to align Ukraine, its economic potential squandered by years of mismanagement, with its neighbors to the West, fanning concerns in Russia that it will lose influence over a region where it has held sway for 300 years."

In "Ukraine Teeters on Outcome of Runoff," Cato senior fellow Doug Bandow writes: "Economically, Kiev has little choice but to increase investment and trade ties with America and Europe; geographically, Ukraine's security inevitably will be linked to Russia. ... American policy-makers should accept the result with equanimity. The United States isn't going to 'lose' Ukraine. Kiev will want to remain a friend of America."

Jonathan Block, editor, jblock@cato.org