The Washington Post reported on a new study from the Pew Center on the States which purportedly criticized state governments for making overly optimistic assumptions on stock returns in their pension fund investments:

“On average, states predict they will see an 8 percent return every year from their investments in the markets. Meanwhile, the S&P 500, the broadest measure of stocks, fell more than 20 percent over the past decade. “

Actually, the sharp decline in stock prices over the last decade makes 8 percent nominal returns far more plausible. The ratio of stock prices to trend earnings is now close to its long-term average of 14 to 1. This allows for a much higher dividend yield and if stock prices rise at the same rate as the economy is projected to grow, then it will easily reach the 8 percent return assumed by pension fund trustees.

–Dean Baker

Dean Baker is senior economist at the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, including Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. Read more about Dean.