The importance of Social Security in relation to the financial well-being of our nation's retired workforce simply can't be overstated.
When the program was concocted in the mid-1930s, it was designed to provide benefits for elderly workers who could no longer provide for themselves. Back then, this was a relatively small group of workers, and the average life expectancy was considerably lower. Today, 63 million people receive a monthly benefit check (nearly 44 million of whom are retired workers), and the average 65-year-old is on track to live another two decades. In other words, Social Security has very much become a vital income stream for our nation's elderly for what's often an extended period of time.
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Where you live can make a big difference
However, the income stream the average beneficiary receives from Social Security could seem like a pot of gold or a pittance, depending on where they live within the United States.
According to data released in February by the Social Security Administration, the average retired worker was netting almost $1,464 a month in benefits. Meanwhile, the average nondisabled survivor benefit to widows or widowers and to disabled workers clocked in at $1,390 and $1,234, respectively. If we were to average all of the 63 million benefit checks issued monthly, the average Social Security benefit is $1,344.38 a month, or about $16,133 a year.
This amount is enough to pull more than 15 million elderly Americans out of poverty each year, but it's also just 29% higher than the federal poverty level of $12,490 in earned income for 2019.
One of the biggest differentiating factors with regard to how far your Social Security dollars will stretch is the state you call home. That's because $1 in one state may not buy you the same amount of goods and services in another.
With this in mind, I turned to 2016 data provided by the Bureau of Economic Analysis (BEA) that compared income and cost of living in all 50 states. Using a base value of 100 to signify an "average" value for a specific cost across the country, the BEA was able to rank each state from highest to lowest in terms of cost.
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However, rather than just accept the BEA's rankings, which focus on all American households, I homed in on one spending category: rent. That's because housing costs are easily the highest expenditure for our nation's senior citizens (even more so than for working-age Americans as a percentage of expenditures), and more seniors than ever have been turning to renting -- or entering retirement with mortgage debt -- than ever before.
Utilizing the BEA's real purchasing power index for rental costs, the following 10 states should allow the average Social Security benefit to stretch the farthest:
- Alabama: 63.2%
- West Virginia: 63.2%
- Arkansas: 63.8%
- Mississippi: 65.0%
- Kentucky: 67.1%
- South Dakota: 69.3%
- Oklahoma: 70.1%
- Ohio: 72.8%
- Missouri: 73.1%
- Indiana: 73.9%
The percentages next to each state represent the real purchasing power of that item (in this case, rent) relative to regional price parities. In English, it just means that states like Alabama and West Virginia offer average rental rates that are almost 37% (100 minus 63.2) below the national average. Living in any of the above states would allow a Social Security beneficiary to pay rent that's, at minimum, 26% below the national average.
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Another study, similar results
I cross-referenced the BEA's results with those of Abodo, which examined average monthly one-bedroom rental rates for all 50 states in 2018. Listed in the same order as above, here are Abodo's rental-rate statistics from last year:
- Alabama: $711
- West Virginia: $713
- Arkansas: $582
- Mississippi: $812
- Kentucky: $736
- South Dakota: $526
- Oklahoma: $613
- Ohio: $682
- Missouri: $710
- Indiana: $685
As you might have expected, the figures don't perfectly line up with those from the BEA. However, with an average rental rate of $1,025 nationally, all 10 of these states are significantly below that figure. In fact, with the exception of Mississippi (which is still 21% below the national average, according to Abodo), rental costs in none of these states would consume more than 55% of the average Social Security benefit check, or 50% of the average retired worker's monthly payout from Social Security.
In short, these states help your Social Security income go farther.
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But wait, there's more
Of course, there's more that current and future beneficiaries should be aware of if they're looking to get the most out of their benefits. This is especially true of the 62% of current retirees that lean on the program for at least half of their monthly income.
For example, both current and future retirees should be aware of possible state-level tax implications on their benefits. It might be a surprise to learn that your Social Security benefits become taxable at the federal level if, as a single taxpayer, your modified adjusted gross income plus one-half of your benefits exceeds $25,000. For married couples filing jointly, this figure is $32,000. These thresholds are the same no matter where you live.
However, 13 states also tax Social Security benefits to some varying degree. Eight of the 10 states listed above don't tax Social Security benefits, which is a good thing. But if you're considering West Virginia or Missouri, you'll want to do a little more homework.
Of the 13 states that do tax benefits, none has a larger income exemption than Missouri at $85,000 for single taxpayers and $100,000 for couples filing jointly. You'd need to be quite well off to owe tax on your Social Security benefits in the Show Me State. Comparatively, West Virginia is one of a select few states that mirrors the federal tax schedule for Social Security benefits. This means that even though rent is cheap, you could easily be subjected to double taxation in the Mountain State.
You should also take into consideration that your cost of living, regardless of which state you decide to call home, is likely to rise over time. That's because the purchasing power of Social Security dollars is on a fairly steady decline. The program's inflationary tether, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), doesn't do a very good job of measuring the costs that seniors are facing, namely because it's an index focused on urban and clerical workers. As a result, important expenses like housing and medical care are underweighted in the calculation, leading to insufficient cost-of-living adjustments.
Ultimately, your Social Security benefit was never designed to replace more than 40% of your income. But for those of you who are or may be more reliant on the program, deciding where to retire can make a big difference on how far your Social Security dollars stretch.
