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The State of Confusion wants to change the current retirement policy for state employees

The State of Confusion wants to change the current retirement policy for state employees. To do so, however, the state must pay the current pension fund members the present value of their promised future payments. There are 210,000 current employees in the state pension fund. The average employee is 18 years away from retirement, and the average promised future retirement benefit is $360,000 per employee. If the state has a discount rate of 4.5% on all its funds, how much money will the state have to pay to the employees before it can start a new pension plan?

Solutions

Expert Solution

Future Amount per employee = 360,000

Number of Employees = 210,000

Total Future amount = 360000*210000

Time to retirement left = 18 years average

Discount rate = 4.5%

Present Value of the future benifits = 360000*210000/(1.045^18) = 34,231,707,880

For each employee it has to pay = 34,231,707,880/210,000 = 163,008.1328

jeff jeffy answered 2 years ago
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