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 funds income is invested in bonds which earn the inflation

rate plus 1.5%.

Estimate the percentage of an employees 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.)