Estimate the percentage of an employees salary

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Reference no: EM131195837

Suppose that in a certain defined benefit pension plan

a. Employees work for 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 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.)

Reference no: EM131195837

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