In an unfunded pension system where current contributions are paid out to current beneficiaries,the total amount of funds available to invest _____ and the interest rate _____.
A)falls;falls
B)rises;rises
C)falls;rises
D)rises;falls

Question

Quizplus · Accepted Answer

In an unfunded pension system, there is no accumulated pool of funds available to invest. The current contributions from active workers are used to pay out benefits to current retirees. As the number of current retirees increases, the total amount of funds available to invest falls. In addition, because there are no funds available to invest, the interest rate is likely to rise as active workers compete for the limited investment opportunities available in the market. Therefore, the correct answer is (C) falls; rises.

In an Unfunded Pension System Where Current Contributions Are Paid