The Southfork Steel Company is in trouble. Since 1960 it has made guar

Question

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The Southfork Steel Company is in trouble. Since 1960 it has made guaranteed payments to retirees out of a pension fund paid into by current employees as a percentage of their salaries. The restructuring of the Southfork workforce, however, has meant that fewer employees are now needed to produce the same amount of work as in the days of the retired employees. Since current employees are unwilling to pay a larger percentage of their salaries into the pension system than their predecessors did, the pension fund will inevitably go bankrupt.

Which of the following, if true, suggests that above reasoning is correct in its conclusion that the pension fund will inevitably go bankrupt?

A. Employees who retire today will, on average, live five years longer than those who retired in the 1960s.

B. The workers’ union has consistently vetoed any efforts on the part of management to cut the level of pension payments to retired employees.

C. Although Southfork Steel now produces almost twice as much steel as it did during the 1960s, overseas competition has driven the price of steel, adjusted for inflation, to less than one-third of its price in the 1960s, and there is no indication that prices will increase at any time in the future.

D. Consultants have advised Southfork management that it can improve efficiency at the plant by implementing further workforce restructuring that could decrease the total number of employees by approximately 10 percent.

E. Southfork employees in management do not take part in the general pension system, but instead pay into and collect from a separate system that guarantees higher payments.

Source:   McGraw-Hill's GMAT  
Difficulty Level:   750

Sajjad1994 · Accepted Answer

Official Explanation

The phenomenon described of fewer employees needed to do the same work is not necessarily an insurmountable problem for the pension system if the current employees pay more into the system than their predecessors did; this could occur if the business itself expanded dramatically and there are now more employees than in the past, or if the revenues per employee are substantially higher than in the past.

Answer C  discards the first of those options; if current inflation-adjusted revenues are around twothirds of what they were in the 1960s (i.e., twice as much steel is sold at one-third the price), then there is a smaller pool of revenue to go around, and it appears that the pension fund will probably go bankrupt.

Answers A and B  could contribute to the problem, but they do not address the fundamental economic problem as directly as C.

ANSWER: C

MeBossBaby · Answer

How is C the correct answer? I marked B.

shruthiarvindh · Answer

Here is my understanding of the passage:
Prethinking:  Lesser number of employees than before, they wont pay high percentage as well --> this will lead to bankruptcy of pension fund.

A. Employees who retire today will, on average, live five years longer than those who retired in the 1960s.
 Does not provide any useful info regarding the funds.
 
B. The workers’ union has consistently vetoed any efforts on the part of management to cut the level of pension payments to retired employees.
 Note the word - guaranteed pension payments in the facts, so given a choice between B and C, I would prefer C.

C. Although Southfork Steel now produces almost twice as much steel as it did during the 1960s, overseas competition has driven the price of steel, adjusted for inflation, to less than one-third of its price in the 1960s, and there is no indication that prices will increase at any time in the future.
 This further gives assertion that there is no other means for the funds. Hence the reasoning is further strengthened.

D. Consultants have advised Southfork management that it can improve efficiency at the plant by implementing further workforce restructuring that could decrease the total number of employees by approximately 10 percent.
 Not relevant, further weakens.

E. Southfork employees in management do not take part in the general pension system, but instead pay into and collect from a separate system that guarantees higher payments.
 Concerned about particular section of employees, not relevant.

mike2100 · Answer

I don't see why c is correct , all what we care about is the number of employees and their salaries
c says that the amount of steel has doubled but the price has fallen to one third , but even if that's matters , the company can still make more profit ,since we don't know the cost price now , maybe it's lower, since fewer employees are now needed to produce the same amount of work 
and maybe it's more , we don't know for sure 
please correct me 
Thx

Sneha333 · Answer

Please explain this Question.

Our focus is not the business here as mentioned in C,the factors that affect the pension funds are the number of employees and their will to pay higher sums for pension finds.The only option is B that supports this.

If employees are less and not willing to pay larger portions provided the pension funds are not cut down-->It will prove the reasoning right.

vladip · Answer

I think B is the correct answer, not C.

sayan640 · Answer

VeritasKarishma  /  GMATNinja ..
Can you please throw some light on it ?

Posted from my mobile device

Doer01 · Answer

Hi,
 I chose D and my reasoning is stated below. 
Argument states that pension for retirees is collected from the current employees as a percentage of their salaries and current workforce is not willing to pay and retirement fund will go bankrupt.

Option D states the same. 
D. Consultants have advised Southfork management that it can improve efficiency at the plant by implementing further workforce restructuring that could decrease the total number of employees by approximately 10 percent.
If the workforce is further reduced, bankruptcy at retirement fund is inevitable.

Option C, which is officially correct, states that the steel rates have fallen beyond half of what they used to be. 
How could this even be the reason behind conclusion? The profit from selling goes to the firm that does not contribute to the retirement fund

I am not buying the official answer.

Anyone with a better line of reasoning? Any help will be appreciated with kudos.

Posted from my mobile device

ritika9809 · Answer

Hey, I may be wrong here's my reasoning to this one
I chose option C for the reason as in the question it says that the employees are not willing to pay a larger percentage of their salaries
Option C says the due to inflation the prices of the steel has gone down which relates to the salaries of the people working now for example if the prices are low which means that the company is earning fewer profits and if the company is earning fewer profits which means that the employees in return either get fewer salaries or are out from the firm. Now if they are getting less salaries then surely they wont be willing to pay a significant portion of their salaries for other's benefits.
If there's any mistake in my reasoning Feedbacks are highly appreciated.

Doer01 · Answer

Hi  ritika9809  ,
 Profits do not have an impact in terms of salaries. Less profits could be linked to lay-offs to some extent. Salaries do not fluctuate with profits, size of workforce does. 
 GMATNinja  Perhaps its time for you to show us the way. :D

akbgmatter · Answer

Option C see seems far from what the conclusion is. In no way can we know that the profits are contributed towards the pension scheme which in turn could translate to the retirement funds will go bankrupt.

VeritasPrepBrian · Answer

I hate to say it but I think this one is broken...the first part of the official solution is really interesting and totally valid (I'll explain that below because I think it's a cool lesson), but that's not at all what C does. C as written talks about the revenues of the company decreasing, but the only way we know that the pension fund gets funding is from employee contributions so revenue isn't directly relevant (we also know that there are fewer employees necessary so there's a chance even that the company is more profitable now than before, so there's a chance that revenue is down but the company's ability to fund the pensions - if it were so inclined, which we don't know - is up). If you didn't like C, I don't blame you...without some kind of more-direct tie to the potential for the company to fund the pension from revenues, C is too far afield.

Which is a bummer because the way the stimulus is set up there's a great opportunity for a cool answer choice that's not *that* far away from C. Take a look at this part of the stimulus:

The restructuring of the Southfork workforce, however, has meant that  fewer employees are now needed to produce the same amount of work  as in the days of the retired employees.

The main premises we have for the pension plan going bankrupt is that:

1) Fewer employees are now needed for the SAME AMOUNT OF WORK as was completed during the time of the retired employees.
2) Current employees will not pay an increased percentage of their salaries to the fund.

Notice that there's a pretty big assumption here, though, that the company isn't doing a lot more work than in the past, which might mean that even with the increased efficiency bolded above the workforce could be larger than in the time of the retirees. The argument assumes that "fewer workers per unit produced" means "fewer workers overall." So you could have a really cool and I think pretty tough correct answer like "Southfork Steel does not produce substantially more steel than it did in the 1960s." That might not on the surface seem like a great Strengthen answer, but it removes the inherent flaw in the gap between "fewer employees for the same amount of work" and "fewer employees overall."

C as written though...it just requires too many other assumptions (company revenues even relate to pension funding, the loss in revenue has left less money for Southfork to pay for pensions even if they did want to etc.) to be the kind of correct answer you'd see on the test.

mimishyu · Answer

the “correct and official” logic behind those questions(such as this one) really perplex lots of students including me, just to say that the logic is very weird and incomprehensible to all of us, are there any methods we could use to grasp the logic???

sakan7 · Answer

Could you please tell me the source of the question ?

Sajjad1994 · Answer

Its McGraw Hill's GMAT also mentioned in the end of the question.

Best Regards

Crytiocanalyst · Answer

A. Employees who retire today will, on average, live five years longer than those who retired in the 1960s.
What if the employees retirement increased by 5 years then the arggument falls apart therefore out

B. The workers’ union has consistently vetoed any efforts on the part of management to cut the level of pension payments to retired employees.
There might be other indegineous of making the employees comply with the law therefore out

C. Although Southfork Steel now produces almost twice as much steel as it did during the 1960s, overseas competition has driven the price of steel, adjusted for inflation, to less than one-third of its price in the 1960s, and there is no indication that prices will increase at any time in the future.
There is no way around this argument since if the market competion is distroying the company there can no way out therefore let us hang on to it

D. Consultants have advised Southfork management that it can improve efficiency at the plant by implementing further workforce restructuring that could decrease the total number of employees by approximately 10 percent.
The plan is just proposed , implementaion of which will only have an effect therefore out

E. Southfork employees in management do not take part in the general pension system, but instead pay into and collect from a separate system that guarantees higher payments.
We have no clue about the percentage distribution of mangement employ to asses their impact therefore out

Therefore IMO C

varshas044 · Answer

The Southfork Steel Company is in trouble. Since 1960 it has made guaranteed payments to retirees out of a pension fund paid into by current employees as a percentage of their salaries. The restructuring of the Southfork workforce, however, has meant that fewer employees are now needed to produce the same amount of work as in the days of the retired employees. Since current employees are unwilling to pay a larger percentage of their salaries into the pension system than their predecessors did, the pension fund will inevitably go bankrupt.

Which of the following, if true, suggests that above reasoning is correct in its conclusion that the pension fund will inevitably go bankrupt?

Hello, 
I am not convinced with the official answer here

We have to find a reasoning that strengthens the conclusion

Premise: Employees are paying % of their salary in pension fund 
Premise: No. of Employees could potential reduced by workfroce restructre (fewer employees are now needed to produce the same amount of work)
Conclusion: Employees are unwilling to pay more money to pension fund, fund will inevitably go banrupt (eventually)

Option A: Employee (maybe a 1000 employees) who are retiring today ----- doesnt make sense, we do not know how many employees, how much fund and how long will it last. REJECTED.

Option B: Not related to the real argument here

Option C: Price of steel has no correlation here. Pesion fund gets its money from empployee's salary and not company revenue. Here there is no indication that revenue loss will mean reduction in employee salary. REJECTED.

Option D: if workforce reduce even further, meaning lesser funds, this seems like a viable option. TRUE

Option E: not relevant to discussion. Management employees are typically only a few.

The Southfork Steel Company is in trouble. Since 1960 it has made guar

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