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Think Inc.
A forum for Hawaii's
business community to discuss
current events and issues.

Sunday, January 27, 2002

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Flying alone

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Do you really know IRA?

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Flying alone

Consumers lose when
there is only one choice

By Eric Drabkin

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Should the proposed merger between Hawaiian and Aloha airlines come to pass we can probably look forward to higher interisland air fares, fewer interisland flights, a deterioration in the quality of service, an increase in unemployment, and higher prices for items shipped via inter-island air -- all consequences of a less competitive market.

Competition in the marketplace forces firms to cater to their customers' wants and needs. If a business is not responsive to its customers, it will soon find that its customers have deserted it for other firms that sell the same product or service.

But what if there are no other firms in the market? What if two firms merge to form a single firm?

If there is no place else to go, concern for the customer need not take center stage. The consumer must either deal with the one firm or not buy the good or service.

With two airlines serving the Hawaiian Islands, neither airline can afford to ignore the customer.

To do so risks losing customers to the rival airline. This means each airline will provide numerous routes throughout the day, even if certain routs and times have relatively low demand. Cutting back such service may lead to a loss of loyal customers.

A single airline would not face this constraint. Obviously there will be no duplication of service. While I have no inside knowledge of any plans to cut specific routes or times, why have two flights to Maui at 9 p.m. when one flight will do? And why have any flights at all to Molokai at 9:30 p.m.?

Thus, should Aloha and Hawaiian merge we will see fewer and less convenient flights and more flight crews, mechanics, and ticket agents out of work.

Competition also tends to keep prices down. Not only do firms compete for the customers' dollars by providing quality and service, they also must ensure that their prices are "competitive." That is, prices should not be set at a level that would encourage customers to seek out other suppliers.

However, with no other suppliers in the market, this competitive force is absent.

Not only will our single airline have less of an incentive to provide good quality and service to its customers, the lack of an alternative method to travel to neighbor islands will likely lead to higher air fares.

Not only will higher prices impact the flying public, it will hurt those who rely on the inter-island tourist trade as fewer people fly. In addition, businesses that use the airlines to ship their products between the islands will suffer.

In particular, producers of certain agricultural products that must be sent quickly to avoid spoilage, such as fresh flowers, will see their costs rise leading to higher prices for items other than airline tickets.

In short, a merger that creates a monopoly where competition previously reigned will rarely benefit the consumer.

And in the case of the proposed airline merger, there are many questions that must be addressed.

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Eric Drabkin is an associate professor of economics at Hawaii Pacific University. He can be reached at edrabkin@hpu.edu.

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Do you know IRA?
Shattering individual
retirement account
misconceptions

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By Judith Sterling
and Michelle Tucker

These days, traditional Individual Retirement Accounts are common retirement savings vehicles. They provide individuals with a means to finance their retirement whereby the amounts set aside, as well as the growth, are not taxed until withdrawn. But even though many people use this beneficial form of investment, many misconceptions remain regarding the rules that govern IRAs.

Once these misconceptions are corrected, it's possible to reap the full benefits of an IRA.

Many people believe that pre-tax contributions to an IRA must be made by Dec. 31 of the tax year in which the deduction will be claimed. Although this seems sensible, Congress has given taxpayers the ability to make pre-tax contributions to an IRA up until the date in which the individual's tax return must be filed (no extensions).

This generally means IRA owners are given until April 15 of the following year to make pre-tax contributions.

Some people believe individuals under the age of majority cannot contribute to an IRA. This is a myth. There is no minimum age at which one can begin to contribute

All that is required is that the IRA owner have taxable compensation that falls within specific gross income limitations. Because of the miracle of compounding, even a few hundred dollars contributed to an IRA by a minor can result in significant savings at retirement.

For instance, a contribution of $500 per year to an IRA, starting at age 15 and ending at age 19 (for a total of $2,500), would be worth $93,623 at age 65, assuming an 8 percent growth rate.

Although it may sound contrary to the above requirement that an IRA owner have taxable compensation, not all individuals that contribute to an IRA are employed. A spouse who works in the home can make contributions to an IRA. All that is required is that a joint income tax return be filed with the working spouse.

Another misconception regarding IRAs deals with minimum required distributions (MRDs).

Upon reaching age 70, an IRA owner is required to make annual withdrawals from the IRA called MRDs. This is so the IRS can start receiving the deferred taxes from the contributions and growth within the IRA. Many people mistakenly believe an MRD is a fixed amount that must be withdrawn from the IRA annually -- no more, no less.

However, the MRD is just what its name states -- a minimum amount required to be withdrawn. If the IRA owner wishes to withdraw more than the MRD, they are free to do so. However, withdrawing less than the MRD will result in a penalty.

Another common misconception is that once a beneficiary designation is made, it can be forgotten.

Wise estate planning requires that beneficiary designations of all retirement plans, life insurance, annuities, wills and trusts be reviewed on a continual basis. Circumstances that effect these various designations include the ever-changing tax law, changes in a beneficiary's financial circumstances, and changes in owners needs, as they grow older.

An experienced attorney specializing in retirement and estate planning can help you understand the facts about IRAs. This solid advice can help you to maximize the benefits offered by a valuable retirement savings vehicle. And with periodic reviews of your beneficiary designations, an attorney can assure that your IRA continues to work for you and your family well into the future.

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Judith Sterling and Michelle Tucker run Sterling & Tucker. They are both certified public accountants and licensed attorneys.

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