Question

3) 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 240,000 current employees in the state pension fund. The average employee is twenty-two years away from retirement, and the average promised future retirement benefit is $400,000 per employee. If the state has a discount rate of 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?

Answer 1

PV= $136,740 each employee

Step-by-step explanation:

Giving the following information:

The state must pay the current pension fund members the present value of their promised future payments. There are 240,000 current employees in the state pension fund. The average employee is twenty-two years away from retirement, and the average promised future retirement benefit is $400,000 per employee. If the state has a discount rate of 5% on all its funds.

We must use the following formula:

PV= FV/(1+i)^n

PV= 400,000/(1.05^22)= $136,740 each employee