For many Americans, Social Security isn't just a check that winds up in their bank accounts once monthly. Rather, it's a financial lifeline that they probably couldn't do without.
According to an April 2020 survey of retirees from national pollster Gallup, a combined 89% are leaning on their Social Security benefits as a major or minor source of income. Similarly, 88% of nonretirees surveyed expect Social Security to be a major or minor income source when they retire. It's worth noting that this 88% figure marks an all-time high for an annual survey that dates back 20 years.
The point is, there's a very good chance that you'll be reliant to some degree on your Social Security income when you retire, or if you're already retired. That makes maximizing your benefit a must, if you still have the ability to do so.
Retired workers in these states are bringing home the biggest monthly checks
What can the average retired worker expect to receive from Social Security? Following a 1.6% cost-of-living adjustment that was passed along at the beginning of 2020, the average payout for the 45 million-plus retired workers was approximately $1,503 per month, or $18,036 a year. It may not sound like a lot, but this payout pulls more than 15 million retired workers out of poverty every year.
But what you might not realize is that this retirement benefit tends to vary pretty significantly from state to state. For instance, the difference in average monthly benefit for retired workers between the No. 1 state and the No. 50 state is $267.59 a month. That works out to a difference of about $3,211 a year!
How do we get these state averages, you ask? Every year, the Social Security Administration (SSA) publishes state-level payment data, providing information on how much was paid to retired workers, as well as how many workers received benefits. Some simple division with the help of a calculator, then adding in the 1.6% cost-of-living adjustment that occurred at the beginning of the year, should give us a pretty accurate look at what the average retired worker in each state is bringing home.
As of the beginning of 2020, seven states had an average monthly Social Security retirement benefit that was at least $100 higher than the national average of $1,503. Here they are, in descending order:
- New Jersey: $1,689.42 per month
- Connecticut: $1,685.29
- Delaware: $1,658.79
- New Hampshire: $1,644.42
- Maryland: $1,624.37
- Michigan: $1,616.43
- Washington: $1,608.13
Why these states?
Why is it that retired workers in these seven states generate so much more than the national average from Social Security on a monthly basis? The most logical answer is likely tied to their income history.
As a brief refresher, your Social Security retirement benefit is determined by four major factors:
- Work history: The SSA takes your 35 highest-earning, inflation adjusted years into account when calculating your monthly benefit.
- Earnings history: The more you earn each year (up to the maximum taxable cap, which is $137,700 in 2020), the higher your eventual monthly payout.
- Birth year: The year you're born determines your full retirement age.
- Claiming age: You can begin taking benefits at age 62, albeit your payout will increase by up to 8% annually for every year you hold off.
The biggest differentiating factor in many of these states is income potential. For example, Maryland, New Jersey, Connecticut, New Hampshire, Washington, and Delaware respectively rank first, second, sixth, seventh, 10th, and 14th in the country in median household income. If people are earning more during their lifetime, they should be expected to receive a higher benefit from Social Security during retirement.
Admittedly, Michigan is the oddball here. The best explanation I can offer is that cost-of-living may play a role in these figures. This is to say that retirees might be choosing to move to states that have a lower cost-of-living in order to make their Social Security dollars stretch further. Michigan, for instance, is one of the 10-most affordable states in the country, with housing costs that are about 25% below the national average. That could certainly be enough to entice retirees to consider the Wolverine State.
Other factors may play a role
However, there are other factors that might be playing a role in creating these payout differences between states that we simply can't quantify.
For instance, beyond just the cost-of-living, senior citizens might choose to move to another state to be closer to family or friends, for a more amicable climate, or to gain access to better healthcare solutions. These external factors can, over time, alter a state's average payout for retired workers.
The other factor here that's virtually impossible to measure is the claiming age of retirees. As noted, workers who wait to take their benefit are going to receive a larger payout, whereas those who claim early can expect a permanent reduction of as much as 30%. While the SSA does provide claiming age data for the country, getting state-level claiming age statistics aren't as easy to come by.
One assumption that may hold water is that higher-earning individuals and families should be less reliant on Social Security benefits during retirement than low-income or middle-income workers and their families. This might mean less need to claim benefits early (i.e., at a reduced rate). If these benefits are allowed to grow over time, it could lead to a higher average payout. This hypothesis would certainly be consistent with the higher-than-average median household income for six out of seven of the aforementioned states.
But of all these factors, income will remain the biggest differentiator between states, with regard to average retirement benefit.