This has been an incredibly busy and much-anticipated month for Social Security beneficiaries.
On Oct. 10, the Bureau of Labor Statistics released inflation data from September, which was the last puzzle piece needed to calculate Social Security's annual cost-of-living adjustment, or COLA, for 2020. Think of COLA as the "raise" that beneficiaries receive from one year to the next that's designed to factor in the inflation they've faced over the past year. I say "raise" with quotation marks, because it's not exactly a raise, so much as an attempt to keep pace with inflation. In other words, it's unlikely that Social Security recipients are getting ahead.
As announced by the Social Security Administration (SSA), the program's nearly 64 million beneficiaries will see a 1.6% COLA passed along, beginning in January. For the average retired worker who was bringing home $1,474.77 a month, as of September, this works out to a raise of around $24 a month. It's certainly much better than 2010, 2011, and 2016, when no COLA was passed along, and 2017, when the COLA was a meager 0.3%. However, a 1.6% COLA is still well below the increase retired workers have been historically accustomed to receiving.
Beneficiaries in these states will receive the largest Social Security raises next year
Furthermore, the raise beneficiaries will net in 2020 from Social Security might just depend on where they live. Although the 1.6% COLA is applied to all 63.79 million traditional Social Security program recipients, the average payout can differ pretty dramatically from state to state.
As an example, using data from December 2017 -- the latest published state-level data from the SSA -- there was a roughly $242-a-month difference in payout between the states with the highest and lowest average retired worker benefit. If a 1.6% COLA is applied to these figures, states that have a higher average payout will be impacted more than states with a lower average retired worker benefit.
So, which states are in line to benefit most from Social Security's 1.6% COLA? As of December 2017, the monthly payouts for the states with the highest average retired worker benefits were as follows:
- New Jersey: $1,553.63
- Connecticut: $1,546.67
- Delaware: $1,517.11
- New Hampshire: $1,498.01
- Michigan: $1,493.77
- Maryland: $1,482.87
- Washington: $1,472.50
- Indiana: $1,464.61
- New York: $1,458.19
- Minnesota: $1,457.22
Again, these are figures from the end of 2017, so they're not factoring in the 2% COLA passed along in 2018, the 2.8% COLA in 2019, or the upcoming 1.6% COLA in 2020. Nevertheless, a number of New England and Eastern states, along with Western standout Washington, should see the greatest impact from Social Security's COLA.
Why these 10 states?
Now, I know what you're probably wondering: Why is the average Social Security payout higher in these 10 states? The answer is partly logical and partly interpretative.
The most logical explanation I can offer is that workers' average annual income is higher than the national average in most of these 10 states. As a reminder, the SSA takes your 35 highest-earning, inflation-adjusted years into account when calculating your monthly payout at full retirement age. While a lot of factors will ultimately determine what you'll be paid each month from Social Security, your earnings history plays a pretty significant role.
According to 2017 Census data, median household income in Maryland, New Jersey, Connecticut, Massachusetts, and New Hampshire was north of $71,300, which was well above the national average. If workers are earning more each year, they should, logically, receive a higher monthly payout from Social Security when they retire.
A more opaque idea, yet something perfectly fitting, is that some retired workers who earned a healthy working wage over their lifetime may be choosing to move to states with a more reasonable cost of living. In other words, living in the Northeast is great is you want a comparatively high working wage, but it can be financially debilitating later in life given the high costs of living associated with Eastern- and New England-based states. This is probably why states with lower median household incomes but also lower costs of living, such as Michigan and Indiana, are among those with the highest average monthly retired worker payout.
A third and final factor, but one that's genuinely impossible to quantify, is the claiming age of retired workers. As you may be aware, eligible workers can begin taking their benefit as early as age 62, or at any point thereafter. But there's an incentive to wait, with each year adding approximately 8% to your payout, beginning at age 62 and ending at age 70. All things being equal (e.g., work history, earnings history, and birth year), a retiree waiting until age 70 can bring home a 76% higher monthly payout than an individual claiming as early as possible (age 62).
While there are a number of factors that might coerce retired workers to take their benefit early and accept a permanent reduction to their monthly payout, insufficient savings and/or poor health are among the likeliest. This would suggest that workers in higher income states may be more financially prepared for retirement, or possibly in better health, and therefore able to claim their Social Security retirement benefit later than workers in other states. This later claim would lead to a higher monthly payout.
Understand that living in one of these 10 states doesn't guarantee you a larger COLA impact when you retire. But there certainly does appear to be a rhyme and reason as to why the average retired worker payout is highest in these states.