Question

Consider a worker who plans to retire and live on a fixed payment pension. How would an increase in inflation above expectation affect the worker's purchasing power in retirement? Please select two answers. Select all that apply: the worker will have no issue with purchasing power because their pension will generate interest at the same rate as inflation as inflation rises, the buying power of the fixed pension plan will not be able to keep up if the same fixed income is earned in 1990 as it was in 1980, inflation will have dramatically increased living expenses and it will be difficult to maintain the same purchasing power inflation will have no affect on the worker living on a fixed payment pension

Answer 1

The correct answers are B) as inflation rises, the buying power of the fixed pension plan will not be able to keep up if the same fixed income is earned in 1990 as it was in 1980. And C) inflation will have dramatically increased living expenses and it will be difficult to maintain the same purchasing power.

An increase in inflation above expectations will affect the worker's purchasing power in retirement in the following ways:  as inflation rises, the buying power of the fixed pension plan will not be able to keep up if the same fixed income is earned in 1990 as it was in 1980. Also, inflation will have dramatically increased living expenses and it will be difficult to maintain the same purchasing power.

That is the problem with pensions. When people retire from work, they will receive a fixed amount of money on a monthly basis. But inflation is always a factor that makes prices to be higher. So if the income level of the individual stays the same, inflation will limit is purchase capacity because the person will still receive the same pension although the prices of products and goods could dramatically change in the case of an increase in inflation above expectations.