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.)