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A state has a pension fund liability of $25 billion, due in 10 years. Each year the Legislature is supposed to set aside an annuity
A state has a pension fund liability of $25 billion, due in 10 years. Each year the Legislature is supposed to set aside an annuity to arrive at this future value. The annuity is based on the rate of return estimates.
a. Estimate the annuity needed each year for the next 10 years, assuming that the interest rate that can be earned on the money is 6%.
b. Assume the investment rate is revised to 8%. Recalculate the annuity needed to arrive at the future value.
c. Can the state take the difference between the two amounts as budget savings this year?
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