The No Economist/Policy Analyst Left Behind Test for Social Security
By Dean Baker

(President Bush believes in testing. President Bush has a mandate.)

President Bush's Social Security Commission assumed that stocks would give an average return of 6.5 percentage points above the rate of inflation over the next seventy five years. The commission uses the Social Security trustees projections, which show that profit growth will average 1.6 percent above the rate of inflation over this period. The current ratio of stock prices to corporate earnings is 25.8 to 1, which means that corporate earnings are on average equal to 3.9 percent of the price of a share of stock.

Use this information to show a set of capital gains and dividends that produces the 6.5 percent rate of return assumed by President Bush's Social Security commission.

Avg. capital gain     Avg. Dividend Yield                Total Return

2005-2015                              

2015-2025

2025-2035

2035-2045

2045-2055

2055-2065

2065-2075

Any economist/policy analyst unable to complete this exercise in less than 1 hour must be retrained until they are competent.

CEPR Projections                              

Avg. capital gain            Avg. Dividend Yield                Total Return

2005-2015                   2.2%                2.3% (@60% of earnings)                       4.5%

2015-2025                   1.5%                2.3% (@60% of earnings)                       3.8%

2025-2035                   1.5%                2.3% (@60% of earnings)                       3.8%

2035-2045                   1.5%                2.3% (@60% of earnings)                       3.8%

2045-2055                   1.5%                2.3% (@60% of earnings)                       3.8%

2055-2065                   1.5%                2.3% (@60% of earnings)                       3.8%

2065-2075                   1.5%                2.3% (@60% of earnings)                       3.8%

Center for Economic and Policy Research, 1621 Connecticut Ave, NW, Suite 500, Washington, DC 20009
Phone: (202) 293-5380, Fax: (202) 588-1356, Home: www.cepr.net