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Estimate the percentage of salary that must be controbuted to pension plan to remain solvent

Suppose that in a certain defined benefit pension plan:

A. Employees work 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 increases at the rate of inflation minus 1%
C. The pension is receives 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).

Solution Preview

See the attached file.

Suppose that in a certain defined benefit pension plan: 
A. Employees work 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 increases at the rate of inflation minus 1% 
C. The pension is receives for 18 years. 
D. The pension fund's income is invested in bonds which earn the inflation rate plus ...

Solution Summary

The solution assists with estimating the percentage of salary contributed to the pension plan to remain solvent.

$2.19