It's no secret: Social Security is a foundational program for our nation's retired workers. Each month, the program pays out benefits to nearly 65 million people, 46.1 million of whom are retirees. Of these retirees, 62% rely on their monthly payouts to account for at least half of their income. Suffice it to say, elderly poverty rates would be through the roof without Social Security.
Given this persistent reliance by seniors on their guaranteed monthly benefit, it's important to net the biggest payout possible. Interestingly, though, this benefit can differ greatly depending on where a retired worker lives.
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How does the Social Security Administration calculate retired worker benefits?
Before digging into the details as to why average monthly payouts can be so different between states, let's first look at the four major factors that are used to determine a workers' full retirement benefit.
The first two factors are linked at the hip: work history and earnings history. The Social Security Administration (SSA) takes your 35 highest-earning, inflation-adjusted years into account when determining what you'll receive monthly at full retirement age. For every year less of 35 worked, the SSA averages a $0 into your benefit calculation.
The third factor that plays a key role in deciphering your retirement benefit is your birth year. That's because your birth year is responsible for determining your full retirement age -- i.e., the age where you become eligible to receive 100% of your monthly payout. Without getting too far into the weeds, imagine your full retirement age as a line in the sand. Claiming benefits prior to reaching this line means accepting a permanent reduction to your monthly payout. Conversely, waiting to claim until after this line can yield a larger monthly payout.
The fourth and final determinant is your claiming age. Retired worker benefits can begin at age 62 or any point thereafter. The hook is that monthly benefits increase by as much as 8% annually, through age 69, for each year a retiree holds off on taking their payout.
This combination of work/earnings data and decision-making is what goes into determining your monthly benefit at full retirement age.
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Beneficiaries in these 10 states are raking in big bucks
However, where you live can have a pretty big impact on what you'll receive during retirement. Earlier this year, the SSA released a mountain of supplemental data for the program, including a percentage distribution by dollar amount for retired workers in all 50 states, as of December 2019.
For the roughly 45.1 million retired workers netting a payout last December, the average monthly benefit was $1,502.85. But for the following 10 states, between 24% and 30.5% of retired workers were receiving at least $500 more on a monthly basis than the national average. These 10 states are:
- New Jersey: 30.5% of all retired workers receiving a Social Security benefit
- Connecticut: 30%
- Maryland: 27.3%
- Massachusetts: 27%
- New Hampshire: 26.2%
- Delaware: 25.9%
- Washington: 25%
- Utah: 24.5%
- Colorado: 24.1%
- New York: 24%
For some context here, 21.5% of all retired workers paid nationally received at least $2,000 in December 2019, with Mississippi bringing up the caboose (15.3% of all monthly beneficiaries received $2,000 or more).
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Here's why Social Security benefits are naturally higher in some states
Now for the $64,000 question: Why is it that roughly a quarter or more of the retirees in each of these states is bringing home at least $6,000 in annual Social Security retirement benefits above the national average?
The most logical answer boils down to income. As I pointed out, earnings history plays a critical role in determining how much a worker will collect in retirement. A worker who earns more should collect more, assuming they worked for 35 years. Among these 10 states, Maryland, New Jersey, Massachusetts, Connecticut, New Hampshire, and Washington respectively rank No. 1, 2, 4, 6, 7, and 10 in median household income by state. Colorado, Utah, Delaware, and New York all rank within the top 15. Since workers are earning more in these states, it's only logical that they're receiving a larger monthly payout during retirement.
You'll also note that many of these states feature a high cost of living. While I don't want to reduce the importance that certain well-paying industries play in attracting talent to certain states, it also can't be overlooked that businesses in these 10 states may simply be upping what they pay their employees because it's costly to live there.
According to data from the Bureau of Economic Analysis, 9 out of 10 of these states (Utah being the exception) features a cost of living that ranges between 5.6% (Colorado) and 39.1% (New York) above the national average. Thus, even though 24% of retired New York beneficiaries are receiving $2,000 or more each month, it's not a guarantee that their payout is getting them very far.
A final postulation as to why there are so many big checks being disbursed in these 10 states has to do with claiming age. It's possible that workers with higher incomes are able to save and invest more of their money, putting them in better financial position when they retire. This would mean less need to take benefits early at a reduced rate. Being able to wait to take benefits until age 67 to 70 is a surefire formula to pump up your monthly payout.
