And do people respond by saving more, retiring later, or moving?
My colleagues and I have always had this notion that, because wage levels vary across the country, workers in high-cost areas would receive lower replacement rates under Social Security’s progressive benefit formula than otherwise identical workers in low-cost areas. This variation in replacement rates could then cause those in high-cost areas to retire later, save more, or be more likely to move in retirement.
The authors use housing costs as a proxy for cost-of-living, since U.S. households spend a large share of their budget on housing, and they focus on metropolitan statistical areas , which capture major population centers and their suburbs. The data show that households in the bottom two terciles experience relatively similar housing prices, whereas those in the top tercile face prices that are around double .
Given the small difference in earnings, it is not surprising that regression results show that even doubling the median house decreases the replacement rate by only 2.4 percentage points. Although this relationship is highly statistically significant, it is economically small given that the average replacement rate in the lowest-cost MSAs is 53% .
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