Phil Works for the Government of Alberta

question 3

Essay

Phil works for the Government of Alberta. Phil is covered by a defined benefit pension plan. Phil just turned 45 years old, and expects to retire at age 65. At that time, the pension plan will pay Phil annual pension payments equal to 2% of his final year's salary for each year of services rendered. The pension payments will continue until Phil's death, which actuaries expect to be when he turns 80 years old. For the current year, Phil will earn $55,000, and this rate is expected to increase by 5% per year. Assume that the Alberta Government uses a 10% interest rate for its pension obligations.
Required:
Determine the current service cost for Phil Jackson's pension for the past year (the year just before he turned 45).

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Definitions:

Price Elasticity

A measure of how much the quantity demanded of a good changes in response to a change in price.

Infinitely Elastic

Describes a perfectly elastic demand or supply curve, where the quantity demanded or supplied changes by an unlimited amount in response to any change in price.

Income Elasticity

A measure of how the demand for a good or service changes in response to changes in income.

Supply Elasticity

The measure of responsiveness of the quantity of a good supplied to a change in its price.