CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Press Center Press Releases Senator Gregg Responds to Challenge on Stock Returns

Senator Gregg Responds to Challenge on Stock Returns

Senator Gregg Responds to Challenge on Stock Returns

For Immediate Release: January 28, 1999

Senator Judd Gregg, a member of the Republican leadership and a prominent proponent of the National Commission for Retirement Policy plan for the partial privatization of Social Security, immediately responded to a challenge to regarding the 7.0 percent projection for real annual stock returns, that appears in the NCRP’s and other privatization proposals.

This challenge was issued last week by Dean Baker, a Senior Fellow at the Preamble Center, and Mark Weisbrot, the Research Director at the Preamble Center, to all the members of Congress who had endorsed a privatization plan. The challenge pointed out that this assumption on stock returns has never been supported by the same kind of year by year break down of the two components, dividend yields and capital gains, as is done with the other economic and demographic variables that form the basis of the projections of the Social Security projections.

Baker and Weisbrot have questioned the plausibility of a 7.0 percent return on stock in the future, since the projection is based on a simple extrapolation from the past. While the economy and profits have grown at a 3.0 percent average annual rate in the past, they are projected to grow at less than a 1.5 percent annual rate in the future. With such slow growth, the only way the stock market can produce 7.0 percent returns is if price to earnings ratios rise to absurd levels in excess of 400 to 1.

While Senator Gregg deserves credit for recognizing the importance of this issue, he did not produce the requested projections. His letter refers to a section of the 1994-96 Advisory Council’s Report which explains that the 7.0 assumption on stock returns is based on past experience. This section does not give the sort of detailed breakdown of projected dividend yields and capital gains that can be found for all relevant economic and demographic variables on pages 57-61 of the 1998 Social Security Trustees Report. As Weisbrot and Baker assert in their response to Senator Gregg (attached), it is unreasonable to ask workers to accept a Social Security plan that depends on the rate of return in the stock market, without producing detailed projections for stock returns that can be subject to the same level of scrutiny as the other projections made by the Trustees. 

 

CEPR.net
donate_new
Combined Federal Campaign #79613