Suppose that in a certain definition benefit pension plan a) Employees work for

Question

Suppose that in a certain definition benefit pension plan
a) Employees work for 45 years earning wages that increase at a real rate of 2%
b) They retire with a pension equal to 70% of their final salary. This pension increase the rate of inflation minus 1
c) The pension is received for 18 year
d) The pension funds income is invested in bonds which earn the inflation rate plus 1.5%
Estimated the percentage of an employee%u2019s salary that must be contributed to the pension plan if it is to remain solvent
Hint does all calculation in real rather than nominal dollar

Explanation / Answer

%u201CA typical defined benefits plan provides an employee with about 70% of final salary as a pension and includes indexation for inflation.%u201D (Hull) The employees wages are constant in real terms. The pension is 0.70X. The real return earned is zero. The present value of the contributions made by one employee is 45XR where R=contribution rate as a percentage of the employees wages. The present value of benefits is 18 x.070x = 12.60x

Therefore the value of R to adequately fund the plan is 45xr = 12.60x

The total of the employer and employee contributions should be 0.280 or 28% of salary.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.