By the time you retire, there's a very good chance that you'll be reliant on Social Security income in some capacity. According to national pollster Gallup, 89% of non-retirees believe they'll need Social Security income to make ends meet.
As for official data from the Social Security Administration (SSA), 62% of today's retirees lean on the program to supply at least half of their monthly income, while some 34% of retired workers effectively depend on Social Security for all (90%-100%) of their income. We can safely say that without this guaranteed payout, the elderly poverty rate would be considerably higher than it is now.
What's also interesting about Social Security's average retired worker benefit is that, at least on a nominal basis, it's not that big. According to the SSA's monthly snapshot from April 2018, the average retired worker received $1,411.07 a month, or $16,933 a year. Even though it might not seem like a lot, this is above the federal poverty level of $12,140 in 2018, and it demonstrates the importance the retirement benefit has played in helping lay a financial foundation for our nation's retirees.
These states have the lowest average Social Security retirement benefits
However, if we were to examine the average Social Security retirement benefit on a state-by-state basis, we'd see quite the variance. Earlier this month, we examined those states paying the most to retired workers, and noted that the average New Jersey retiree, who's collecting an average of $1,553.63 a month, nets $1,711 extra per year over the national average.
Today, we're going to take a look at the 10 states with the lowest average Social Security retirement benefit, based on data released by the SSA in April 2018.
- Louisiana: $1,311.72
- Maine: $1,314.22
- Mississippi: $1,319.06
- New Mexico: $1,323.16
- Montana: $1,331.30
- Arkansas: $1,333.93
- South Dakota: $1,336.28
- Kentucky: $1,340.30
- Alaska: $1,343.39
- North Dakota: $1,344.48
In total, the average retired worker in 28 out of 50 U.S. states is receiving less than the national average retirement benefit, as of April 2018. In Louisiana, the average retiree is taking home around $2,900 a year less than the average retired worker in New Jersey. Likewise, Louisiana's retired workers are netting Social Security income that's about $100 a month below the national average, or about $1,200 a year.
Why these states are lagging
As was the case with for the states with the highest average benefit, the biggest differentiating factor for the states with the lowest average retirement benefit is earnings. Though there are more than a half-dozen factors that can ultimately impact your Social Security take-home, your wage income is a major component. The SSA takes your 35 highest-earning, inflation-adjusted years into account when determining your retirement benefit at full retirement age. Essentially, the more you make per year, up to the maximum taxable earnings cap, the more you'll be paid by Social Security when you retire.
According to 2015 median household income data from the U.S. Census Bureau, Louisiana, New Mexico, Kentucky, Arkansas, and Mississippi were five of the bottom seven states in median household income. If people are earning less per year than the national average, it would only make sense that their Social Security payouts are lower during retirement.
Cost of living may also be playing a critical role. If a retired worker has earned less than the national average over their lifetime, it may make sense to seek out a place to retire where cost-of-living standards are low. In other words, San Francisco and New York City probably aren't reasonable retirement destinations.
With the exception of Alaska, the other nine states listed above have a Regional Price Parity Index reading of less than 100, as of 2015, according to the U.S. Bureau of Economic Analysis. With regional price parity equating to 100, it means these states tends to be a few percentage points, to a double-digit percentage, cheaper than the national average. In other words, retirees are able to make their Social Security dollars stretch farther in these states, so this could be why so many lower lifetime-income workers flock to them.
As for the anomaly that is Alaska, its inclusion might be best explained by the fact that it's the only U.S. state that has no sales or income tax. That might be just enough of a lure to attract lower-income retirees.
Looking at the big picture
However, current and future retirees should understand that this list doesn't define what they're capable of. For instance, if you live in Louisiana, you aren't doomed to receive $100 a month less than the national average when you claim Social Security. Everything is based on your income and work history, your birth year, and your claiming age.
Though you can't do anything about when you're born -- your birth year determines your full retirement age, which is when you're able to receive 100% of your retirement benefit -- you certainly have control over your wage income, the years you work, and when you file for benefits. Adjusting these variables can have a big impact on what the program pays you when you retire. All things being equal -- earnings, work history, and birth year -- a person claiming benefits at age 70 can net up to a 76% higher monthly payout than someone claiming retirement benefits as early as possible at age 62.
Ultimately, averages are just that... averages. It's what you make of your own work and earnings history that matters.