Another way to boost the real return on bonds would be for inflation to fall sharply, while bond yields held steady or rose. But if inflation declined because of a weaker economy, that too might be a bad omen for the stock market.
The very long-term trend has been one of shrinking real returns on U.S. bonds.
By Professor Siegel's calculations, long-term government bonds produced a 4.8% average annual real rate of return from 1802 to 1870, a 3.7% return from 1871 through 1925 and a 2.2% return from 1926 through 2001.
As noted above, the number shrank further in the 1946-2004 period, to about 1.6%.
Implicit in those declining real returns is that Treasury bonds have become much more popular over the decades. They just about had to become more popular with investors worldwide, given how much the U.S. has needed to borrow.
There is plenty of debate today about America's ability to continue attracting foreign capital to fund our huge trade and budget deficits. If that money dries up, it's conceivable that interest rates could rocket in response.
Absent the doomsday scenario, however, many experts see real long-term government bond returns staying close to where they are now.
"In every case we're guessing, but if I were to guess where real rates would be 10 years from now I'd guess 2%, not 3%," said John Shoven, an economics professor at Stanford University.
Shoven is a fan of private Social Security investment accounts and has written extensively on the idea. But he said the government's assumption of a 3% real rate of return on Treasury bonds "is not realistic today."
Why does the administration use that number?
White House spokeswoman Claire Buchan said the 3% figure "is the number the Social Security Administration actuary uses, and all of the estimates in the president's proposal comport with" the actuary's data.
Stephen Goss, the chief actuary at the Social Security Administration in Washington, said he considered 3% "a reasonable place to be" given that the real return on government bonds since 1980 has been more than twice that number.
"It's our best judgment based on the moment," Goss said. It wouldn't make sense, he said, for the Social Security system's assumptions to change too frequently, given that the system is supposed to take a long-term view of its income and outgo.
