“Most pension funds assume a 10 percent rate of return, the historical average,” said Dean Baker, a co-director of Center for Economic and Policy Research (CEPR). “There are practically no plausible scenarios in which stocks will only produce a 4.5 percent rate of return, especially when one considers our current low price-to-earnings ratios.”
“The Pension Return Calculator” allows users to manipulate several variables --including nominal rates of return on stocks and GDP growth-- to show price-to-earnings ratios from 1962-2050 in an attempt to achieve a risk-free, 4.5 percent rate of return.
The calculator demonstrates that attempts to scale back public pensions based on pessimistic expectations of rates of return are misguided. Barring another downturn of the magnitude of the Great Recession, it is highly unlikely that the rate of returns on public pensions will not be near the historic average.
[Excerpted from the Center for Economic and Policy Research. Access CEPR's Pension Return Calculator here.]