In less than a week, Social Security will hit a major milestone: its 85th anniversary since being signed into law.
Since its inception, Social Security has been responsible for providing a financial foundation for tens of millions of retired workers, and is currently pulling about a third of its retired workers out of poverty each year. Last year, the program paid out almost $1.05 trillion in scheduled benefits, most of which made its way into the hands of retired workers.
Yet, Social Security benefits aren't one-size-fits-all for retirees. Where you can live can make a big difference with regard to what you'll be paid each month. In particular, retired workers in five states are currently collecting at least $121 a month more than what the average retired worker nets in the United States.
But before diving into the five states where Social Security retirement benefits are highest, I believe it makes sense to first understand how those monthly payouts are calculated.
Here's how your monthly Social Security benefit is calculated
Although there are more than a half-dozen factors that can affect what a retired worker brings home or gets to keep from Social Security, there are four that stand head-and-shoulders above the rest.
The first two, work history and earnings history, are inextricably linked. The Social Security Administration will take a workers' 35 highest-earning, inflation-adjusted years into account when calculating their monthly benefit at full retirement age. Thus, maximizing your benefit involves not only earning as much as you can in the years you do work (up to the maximum taxable earnings cap, which is $137,700 in 2020), but also working a minimum of 35 years.
The third factor is your full retirement age, or the age at which you become eligible to receive 100% of your monthly payout, as determined by your birth year. For baby boomers and the vast majority of future retirees, your full retirement age is 66, 67, or somewhere in between. The point is, claiming your benefit prior to reaching your full retirement age will result in a permanent reduction to your monthly payout, whereas waiting to take your payout until after your full retirement age can boost your monthly benefit beyond 100%.
Fourth and finally, there's your claiming age. When you actually begin taking your benefit will determine whether you're payout is reduced by as much as 30% per month or lifted by as much as 32%. All of these factors plays a role in determining a retired workers' monthly benefit from Social Security.
Social Security payouts in these states are much higher than the national average
At the beginning of 2020, the average retired worker in the U.S. saw their monthly payout cross above $1,500 for the first time in history. This $1,503 average monthly payout reflects the 1.6% cost-of-living adjustment passed along to Social Security's beneficiaries when the year began.
But in five states, retired workers are bringing home a bit more bacon -- between $121 and $186 more per month than the national average, to be precise:
- New Jersey: $1,689 per month
- Connecticut: $1,685
- Delaware: $1,659
- New Hampshire: $1,644
- Maryland: $1,624
Now, before you start calling up moving companies and asking for the best rate, let me assure you that moving to these states won't guarantee you the highest possible Social Security payout. Instead, there are other factors that have likely played a role in pushing retirement benefits for these five states well above the national average.
For instance, income plays a big role. Maryland, New Jersey, Connecticut, New Hampshire, and Delaware respectively rank No.'s 1, 2, 6, 7, and 14 in terms of median household income in 2020. States where workers are generating consistently higher annual wages and salaries than the national average should rightly be expected to receive a higher monthly benefit during retirement.
For some states, like Maryland, proximity to skilled job opportunities plays a key role. Maryland's proximity to Washington. D.C., and the job opportunities within and surrounding the D.C. area, are a big reason its residents make a lot of money. For other states, such as New Jersey and Connecticut, their tie-ins to the financial industry and New York's financial district have likely lifted household income.
But it's not just income that's likely responsible for the disparity in monthly benefits. The average claiming age of retirees may well be higher in these five states.
You should note that this is mere speculation on my part, as claiming-age statistics at the state level are difficult to come by. However, with workers in these states earning more than the national average on an annual basis, they may be less likely to be reliant on Social Security income during retirement (i.e., they're more likely to have saved and invested for their future given their higher income). This would suggest that higher-income workers may wait longer to take their Social Security payout, which in this case would pump up their eventual monthly benefit and the average benefit of retired workers in a given state.
Another possible reason these five states stand out could be due to retired workers moving into or out of them over time. Retirees move for all sorts of reasons, including to be closer to family and friends, to enjoy better weather, to gain access to better healthcare services, and even to avoid a higher cost of living. Over a long period of time, these factors can influence the average benefit received by retired workers in a state.
Once again, moving to these five states won't guarantee you a higher Social Security benefit. But there do appear to be a handful of factors that give working Americans the opportunity to net a larger monthly payout in these states.