Across the country, workers with similar skills earn different compensation to reflect the cost of housing in their local labor market. Yet, Social Security benefits are determined by a national formula that does not take local price levels into account. To the extent that living in an area with a high cost-of-living translates to higher wages, workers in these areas could end up with lower replacement rates than otherwise similar workers in less-expensive areas. If the difference is substantial, workers might respond by saving more, working longer, or retiring to a lower-cost location.
An analysis by the Center for Retirement Research at Boston College shows that Social Security replacement rates are lower in more-expensive areas, but the gap is somewhat smaller than anticipated because earnings have only partially kept up with the cost of financing a house. In response to the gap that does exist, households—especially the more educated—save more; and some homeowners move when they retire.
Read the full brief here.