The Impact of High Housing Costs on Retirement

The formula for calculating Social Security benefits recognizes that it’s more difficult for lower-paid workers to afford retirement. Their future retirement benefits will replace a higher percentage of their earnings than, say, a corporate executive will receive.

But workers in similar jobs who live in expensive coastal cities are at a disadvantage: steep housing costs. Workers’ wages aren’t keeping up with rising house prices, and that inherent disadvantage doesn’t go away when they retire.

But this study looks specifically at how well Social Security’s progressive benefit formula protects older Americans in high-cost cities.  Having to pay high housing expenses will put workers who are currently in their mid-50s at only a slight disadvantage when it comes to Social Security benefits in retirement.

To arrive at this conclusion, Laura Quinby and Gal Wettstein weighed two opposing forces that affect Social Security’s replacement rate, which is the share of a worker’s earnings that will be covered by their benefits.

Employers in metropolitan areas with steep housing costs pay more to attract and keep workers. And if they earn more, Social Security’s benefit formula comes into play because less of their income will be replaced when they retire. On the other hand, wage increases that lag behind surging local house prices have the opposite effect, partly offsetting the penalty with respect to Social Security replacement rates.  

The upshot: the decline in the replacement rate for a typical older household is less than 1 percentage point in an area with 10 percent higher house prices, the researchers find. Living in an area where house prices are double – say San Diego vs lower-cost Minneapolis – reduces the rate by 2.4 percentage points.

The impact of high-cost housing on how much workers get from Social Security is “economically small given that the average replacement rate in the lowest cost [metropolitan areas] is 53 percent,” the researchers conclude.

Still, workers in high-cost cities seem to be compensating for the lower replacement rates. Older households in the highest-cost cities, especially more educated people, who tend to earn more, are saving enough to eliminate the small gap between their replacement rates and the higher rates typical in other areas, the researchers find.  And some homeowners even move to lower-cost areas to reduce their living costs when they retire.

To read this study by Laura Quinby and Gal Wettstein, see “How Does Local Cost-of-Living Affect Retirement for Low and Moderate Earners?”

The research reported herein was derived in whole or in part from research activities performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement and Disability Research Consortium.  The opinions and conclusions expressed are solely those of the authors and do not represent the opinions or policy of SSA, any agency of the federal government, or Boston College.  Neither the United States Government nor any agency thereof, nor any of their employees, make any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report.  Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.