Finance

Investors are thinking about Social Security income the wrong way

Published

3 months ago

February 15, 2025

Based on a lot of the recent dire headlines, many Americans may have come to think of Social Security as an asset that is going to disappear from their financial future rather than be part of it, but it may be a bigger factor in portfolio success than it gets credit for, according to investing legend Charles Ellis.

The steady stream of income provided by Social Security can influence asset allocation decisions that improve overall performance, says Ellis, who has written many books on investing and helped to pioneer the index fund space.

“We don’t talk about it. We don’t measure it. We don’t quantify it. But it’s a substantial asset,” Ellis told CNBC’s Bob Pisani on “ETF Edge” this week.

He argues Social Security functions similarly to an inflation-protected bond. Yet, it is rarely factored into investor asset allocation plans.

Overlooking Social Security can be a big mistake, said Ellis, whose books on finance include “Winning the Loser’s Game,” and whose new book is “Rethinking Investing – A Very Short Guide to Very Long-Term Investing.”

“Be very surprised if you don’t have something on the order of $250[000] to $350,000 coming your way through the Social Security program,” Ellis said on “ETF Edge.”

Failing to recognize this can lead to overly cautious investing, he added.

The S&P 500 has averaged around 12% annual returns since 1928, according to New York University Stern. The U.S. 10 Year Treasury has returned just about 5% over the same time period.

Ellis says Social Security’s steady income stream allows for greater stock exposure.

“Almost anybody looking at the reason for holding bonds talks about the desire to reduce the fluctuations,” he said.

He gave the example of an inheritance that an adult child expects as a parallel thought experiment. “If you have wealthy parents that are going to give you an inheritance in the future, any of those things that you really know are valued, why not include them in your thinking so that you won’t overweight yourself in fixed income?”

“Why not include [Social Security] in your thinking?” Ellis said.

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