Question

As employees get closer to retirement, the balance of the pension liability increases over time. This is termed the ______.

total pension liability
service cost component
net pension liability
interest cost component

Answer 1

The question relates to the 'interest cost component' of the pension liability, which refers to the increasing obligation as employees near retirement.

Step-by-step explanation:

As employees approach retirement age, the anticipated obligation that a pension plan has to pay them increases; this growing obligation is known as the interest cost component of pension liability. Pension plans, often provided by firms, are structured as defined benefits plans, which signify a fixed annual amount promised to retirees. However, this fixed income can pose a significant challenge over time, especially when considering the effects of inflation. The combination of inflation and a fixed pension can lead to retirees experiencing a considerable loss of buying power in their later years.