National Average Wage Index - Explained
Whgat is the National Average Wage Index?
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Table of ContentsWhat is the National Average Wage Index?How is the National Average Wage Index Used?Academic Research on National Average Wage Index (NAWI)
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.
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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 National Average Wage Index of 2017 is calculated as 50,321.89. It is 3.45% higher than the index of 2016. The wages of individuals are indexed to the NAWI on the year the person turns 60. 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. For example, lets assume Mr. Burkes earnings were $40,000 for the year of 1990. The NAWI for the year was $21, 027.98. Mr. Burke turns 60 in the year of 2016. The NAWI for 2016 is $48,642.15. The index factor is ($48,642.15 / $21,027.98) = 2.31. The inflation-adjusted earning of Mr. Burke in 1990 is his earning in that year multiplied by the index factor, ($40,000 x 2.31) = 92,400.
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