National Average Wage Index - Explained
Whgat is the National Average Wage Index?
Written by J. Mance Gordon
Updated at May 6th, 2024
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What is the National Average Wage Index?
The Social Security Administration (SSA) of the United States uses the National Average Wage Index (NAWI) for computing a persons retirement benefits.
The SSA calculates the NAWI once a year to measure the wage trend in the U.S., and it is computed based on income subject to federal income taxes and contributions towards deferred compensation plan.
The index is also used for updating several factors in the operation of the Old-Age, Survivors and Disability Insurance (OASDI) program.
How is the National Average Wage Index Used?
The policymakers follow the National Average Wage Index to understand the wage trend in the U.S. and if there is a wage inflation reflected by this index, they might want to increase the interest rate to counter it.
On the other hand, if the wage inflation is decreasing, they might want to reduce the interest rate to boost the economy and labor market. Thus, the National Average Wage Index affects the decisions of the Federal Reserve.
The SSA calculates the National Average Wage index by multiplying the previous years NAWI with the percentage change in average wages (according to the SSAs average wage data) between the previous year and this year.
The wages of individuals are indexed to the NAWI on the year the person turns 60.
How is Wage Indexing Used?
The Social Security Administration uses wage indexing to adjust an individuals earning history to inflation.
The Social Security Administration takes the NAWI for the year the individual turns 60 and divides it by the NAWI for the year they are indexing. Then the individuals included earnings are multiplied by this number for getting that years inflation adjusted earnings.
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