IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

What Stock Market Returns To Expect For The Future?

  • Peter A. Diamond

Over the long term, stocks have earned a higher rate of return than Treasury bonds. Therefore, many recent proposals to reform Social Security include a stock investment component. In evaluating these proposals, the Social Security Administration’s Office of the Actuary(OACT) has generally used a 7.0 percent real return for stocks (based on a long-term historical average) throughout its 75-year projection period. For the return on Treasury bonds, it currently assumes some variation in the initial decade followed by a constant real return of 3.0 percent. Therefore, its current assumption for the equity premium, defined as the difference between yields on equities and Treasuries, is 4.0 percent in the long run. Some critics contend that the projected return on stocks—and the resulting equity premium—used by the OACT are too high. It is important to recognize that there are two different equity-premium concepts. One is the realized equity premium, measured by the rates of return that actually occurred. The other is the required equity premium, which is the premium that investors expect to receive in order to be willing to hold available amounts of stocks and bonds. These are closely related but different concepts and can differ significantly in some circumstances. Over the past two centuries, the realized equity premium was 3.5 percent on average, but it has increased over time. For example, between 1926 and 1998, it averaged 5.2 percent. The increase is mainly due to a significant decline in bond returns, since long-term stock returns have been quite stable. The decline in bond returns is not surprising given that the perceived risk of federal debt has dropped substantially since the early nineteenth century. Based on an initial look at historical trends, one could argue for a somewhat higher equity premium than the 4.0 percent used by the OACT. Critics argue, however, that the OACT’s projections for stock returns and the equity premium are too high. These criticisms are based on three factors: (1) recent developments in the capital market that have reduced the cost of stock investing and led to broader ownership; (2) the current high value of the stock market relative to various benchmarks; and (3) the expectation of slower economic growth in the future.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://crr.bc.edu/briefs/what-stock-market-returns-to-expect-for-the-future/
Download Restriction: no

Paper provided by Center for Retirement Research in its series Issues in Brief with number ib-2.

as
in new window

Length: 24 pages
Date of creation: Sep 1999
Date of revision:
Handle: RePEc:crr:issbrf:ib-2
Contact details of provider: Postal: Hovey House, 140 Commonwealth Avenue, Chestnut Hill, MA 02467
Phone: (617) 552-1762
Fax: (617) 552-0191
Web page: http://crr.bc.edu/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Arthur B. Kennickell & Martha Starr-McCluer & Annika E. Sunden, 1997. "Family finances in the U.S.: recent evidence from the Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-24.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:crr:issbrf:ib-2. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Grzybowski)

or (Christopher F Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.