Some companies offer their employees defined benefit pension plans. Under these

Question

Some companies offer their employees defined benefit pension plans. Under these plans, employees are promised a fixed monthly payment after they retire. The federal government regulates some aspects of these plans. A reporter for the Wall Street Journal wrote that under a former employer's pension plan she was to receive 423 per month beginning in 14 years when she turned 65 years old. She received a letter from her former employer offering a one-time payment of $32,088 in exchange for her agreeing not to receive the monthly pension payments.

Suppose that the reporter's former employer expects that the reporter will live to be 85 years old. That means she would receive the pension payments for 20 years. The total amount she would receive would be $423 per month ×12 months per year×20 years = $101,520

Should she turn down the one-time payment?

A.

Maybe, the present value of future payments depends on interest rates, which are unknown.

B.

No, her employer might go out of business.

C.

Yes, the interest rate would have to be higher than 8.58.5 % to justify such a low one-time payment.

D.

Yes, the one-time payment is less than a third of the amount she would receive in pension payments.

Explanation / Answer

May be she turn down the one-time payment , the present value of future payments depend on interest rates, which are unknown. In this case, although we know the total amount of monthly payments , we do not have enough information to evaluate option. Although,the total amount of her monthly payments is known,the present value of that series of future payments is unknown because the interest rate is unknown.

Hence,option(A) is correct.

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