Retirement & Financial Planning Report

The Social Security “replacement rate” is weighted toward lower-earners. Image: Alexey Rotanov/Shutterstock.com

The high cost of housing in some areas of the country, particularly in major city areas, effectively makes retirement benefits and COLA adjustments less valuable, a study has said.

“Over the last 50 years, constraints on the supply of housing in coastal labor markets, such as the metro areas of New York City and San Francisco, have caused prices to rise faster than the national average,” said the Center for Retirement Research.” As a result, employers in these high-cost labor markets pay more to attract and retain workers.”

While those higher wages help make up for the difference in housing costs, they also mean that those individuals will receive lower Social Security benefits, measured as a percentage of their pre-retirement income, than will lower-earnings, it said. That’s because the Social Security “replacement rate” is weighted toward lower-earners.

The study examined three possible ways that affected persons might make up for that difference and found that by far the most commonly used was to increase savings, which higher salary rates enable. It said that a doubling of the median home price in a city area—a metropolitan statistical area, or MSA, as the government measures them—is associated with roughly a doubling of a household’s lifetime savings.

“This amount of new saving virtually eliminates the replacement-rate gap. For example, in 2021, households in the highest-cost MSAs could use their additional savings to purchase an annuity on the private market that, when combined with Social Security, would replace around 53 percent of their lifetime earnings. This 53-percent replacement rate is equal to what households in lower-cost MSAs get from Social Security,” it said.

It also found that overall, workers in such areas draw Social Security benefits slightly later, and therefore receive higher monthly benefits, although the difference was not statistically significant. It similarly found only a “weakly significant” higher rate of relocating after retirement to lower-cost areas.

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