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.)
