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Pension Problem Benefits and Contributions The Certainty Company (CC) operates in a world of certainty. It has just hired Mr. Jones, age 20, who
Pension Problem Benefits and Contributions The Certainty Company (CC) operates in a world of certainty. It has just hired Mr. Jones, age 20, who will retire at age 65, draw retirement benefits for 15 years, and die at age 80. Mr. Jones's salary is $20,000 per year, but wages are expected to increase at the 5% annual rate of inflation. CC has a defined benefit plan in which workers receive 1% of the final year's wage for each year employed. The retirement benefit, once started, does not have a cost-of-living adjustment. CC earns 10% annually on its pension fund assets. Assume that pension contribution and benefit cash flows occur at year-end. a. How much will Mr. Jones receive in annual retirement benefits? b. What is CC's required annual contribution to fully fund Mr. Jones's retirement benefits? c. Assume now that CC hires Mr. Smith at the same $20,000 salary as Mr. Jones. However, Mr. Smith is 45 years old. Repeat the analysis in parts a and b under the same assumptions used for Mr. Jones. What do the results imply about the costs of hiring older versus younger workers? d. Now assume that CC hires Ms. Brown, age 20, at the same time that it hires Mr. Smith. Ms. Brown is expected to retire at age 65 and to live to age 90. What is CC's annual pension cost for Ms. Brown? If Mr. Smith and Ms. Brown are doing the same work, are they truly doing it for the same pay? Would it be "reasonable" for CC to lower Ms. Brown's annual retirement benefit to a level that would mean that she received the same present value as Mr. Smith?
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