January 2012, David Rosnick and Dean Baker

This working paper argues that pension funds should adopt a funding principle that is consistent with a return on holdings conditional on the state of the stock market. As will be shown, the expected “conditional rate of return” used in making this assessment will vary depending on the current ratio of stock prices to trend corporate earnings. This funding rule will lead to a more even flow of contributions into the fund than a rule that is based on a fixed return for assets over time.

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