Suppose that in a certain defined benefit pension plan (a) Employees work for 45

Question

Suppose that in a certain defined benefit pension plan

(a) Employees work for 45 years earning wages that increase at the real rate of 2%

(b) they retire with a pension equal to 70% of their final salary. This pension increases at the rate of inflation minus 1%.

(c) The pension is received for 18 years.

(d) The pension fund's income is invested in bonds which earn the inflation rate plus 1.5%.

Estimate the percentage of an employee's salary that must be contributed to the pension plan if it is to remain solvent. (Hint: Do all calculations in real rather than nominal dollars.)

Explanation / Answer

By Ren

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