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15 Dec 2018

Suppose that in a certain defined benefit pension plan (a)Employees work for 45 years earning wages that increase at a realrate of 2%. (b) They retire with a pension equal to 70% of theirfinal salary. This pension increases at the rate of inflation minus1%. (c) The pension is received for 18 years. (d) The pensionfund’s income is invested in bonds which earn the inflation rateplus 1.5%. Estimate the percentage of an employee’s salary thatmust be contributed to the pension plan if it is to remain solvent.(Hint: Do all calculations in real rather than nominaldollars.)

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Irving Heathcote
Irving HeathcoteLv2
18 Dec 2018

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