Jhon is considering his retirement. He is 60 and can either retire now or five years later. He expects he will live up to the age of 80. His annual wage is w regardless of his retirement decision. His pension scheme is designed as follows.

The contribution rate is t. That is, he contributes tw per year.

Annual beneft is the r portion of the annual wage at retirement. That is, his benefit is rw per year. This portion r is dependent on the contribution period T in the following manner. r = a + bT He contributed to his pension for T0 years. His disutility of work (or forgone utility of leisure) is exactly the same as his wage w in money term. For simplicity, we assume the market interest rate is 0.

(a) First, we calculate the cost of delaying retirement. By delaying retirement, Jhon should contribute 5 more years and cannot receive the benefit during the time. What is the present value of the additional contribution and forgone pension benefit if he delays retirement for 5 years?

(b) Second, we calculate the benefit of delaying retirement. By delaying retirement, his benefit will increase. What is the present value of the additional benefit he can collect after retirement if he delays retirement?

(c) We compare the benefit and cost of delaying retirement. What is the condition that it is better for him to retire later?