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 )

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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%

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%.

(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.)

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