National Average Wage Index Defined
The Social Security Administration (SSA) of the United States uses the National Average Wage Index (NAWI) for computing a person’s 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.
A Little More on the National Average Wage Index
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 year’s NAWI with the percentage change in average wages (according to the SSA’s 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 individual’s 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 individual’s included earnings are multiplied by this number for getting that year’s inflation adjusted earnings.
For example, let’s assume Mr. Burke’s 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.
References for National Average Wage Index
Academic Research on National Average Wage Index (NAWI)
Net marginal Social Security tax rates over the life cycle, Cushing, M. J. (2005). National Tax Journal, 227-245. According to this paper, the estimate was made regarding the net margin Social Security tax rates which were classified by age, for the alliance of workers covered by the Social Securities in 2000, 2010, 2020 and 2030. This research paper however extends and updates Samwick and Feldstein’s study of 1992. According to their research, which postulated that the net tax rates are much higher for young workers than the older workers (according to the data gotten in 1990)? This paper, however, concludes that the for the net tax rate to be uniformly spread across age group, proper estimation must be carried out. In this paper is also the Disability Insurance Policy.
The effect of retirement under Social Security at age 62, Muksian, R. (2004). Journal of Financial Planning, 17(1), 64. This paper explains the effect of retirement under social security at age 62. This paper, however, is important for those intending to retire or the retiree. It helps to explain the effect of social securities on retirements.
How Would Cardin’s VAT Affect Social Security Recipients?, Viard, A. D. (2015). The aim of this paper is to explain the ways in which value-added taxes (VAT) can affect Social securities in an economy. This paper, however, considers the Progressive Consumption Tax Act of 2014 which includes the adoption of a 10 per cent a value-added tax on goods.
Disability insurance income saves lives, Gelber, A., Moore, T., & Strand, A. (2018). According to this research paper, it was observed that an increase in payment from the United States Social Security Disability Insurance has in one way or the other cause a reduction in mortality. This paper adopts the use of administrative data on all new DI beneficiaries ranging from 1997 to 2009. Discontinuity was explored from these beneficiaries by using a regression kink design and an estimated result of 1000 USD in annual DI payment causes a decrease in the annual mortality rate of beneficiaries with lower income by approx. 0.1 to 0.25% points. This result means that the elasticity of the annual mortality rate with respect to the annual DI income level is primarily around -0.6
Professional, research, and publishing trends in operations and supply chain management, Simpson, D., Meredith, J., Boyer, K., Dilts, D., Ellram, L. M., & Leong, G. K. (2015). Journal of Supply Chain Management, 51(3), 87-100. According to the report regarding the thought of a big and large group of scholars in the supply chain management and field operations studying the future and current issues facing the business world as a whole, this paper, however, examined a serious aspect of a particular sector of the economy. A perceived lack of relevance was noted in this research paper and also an increase in the demand for the use of methodological rigour and a large data set alongside higher expectation for publishing. However, this paper provides recommendations on how these issues can be addressed and how to continually adapt and move the economy forward.
Real wage trends in Canada 1900-26: Some provisional estimates, Bertram, G. W., & Percy, M. B. (1979). The Canadian Journal of Economics/Revue Canadienne d’Economique, 12(2), 299-312. According to this study, the real wage trends in Canada from 1900-1926 was considered and some provisional estimates were drawn to explain this process mathematically.
Minimum wages, labour market institutions, and youth employment: a cross-national analysis, Neumark, D., & Wascher, W. (2004). ILR Review, 57(2), 223-248. This paper estimates the effects of employment on the changes in the national minimum wages by adopting the use of a pooled cross-section time series data set which comprises of 17 OECD countries ranging from the period of 1975-2000. According to this paper, the average estimated effect is consistent having in mind that the minimum wages cause the losses of employment majorly among the youths. Nonetheless, this result also indicates that the minimum wages appear smaller in some countries (with the subminimum provision of wages for youths). This study shows that the more restrictive the labour standards and higher union coverage, the higher the strength of misemployments that affects the minimum wages which are strongest in countries with the lowest regulated labour market policy.
Regional disparities in Slovakia from the aspect of average nominal wage, Uramová, M., & Kožiak, R. (2008). This paper explains the effects of deepening regional differences in Slovakia regarding the level of the NUTS 3 gotten from the development of the average nominal wage. This wage, however, is a major pointer of the economic and social development of the living and regions standard of the whole population. These differences in the average nominal wages gave rise to a negative response in businesses and at work and also exacerbate the rate at which the region lags behind thereby developing a negative impact on other politics’ region’s development.
Occupational adjustment of the prospective payment system wage index, Pope, G. C. (1989). Health care financing review, 11(1), 49. According to this research paper, the bias in the Medicare prospective payment system (PPS) hospital wage index that rose from its inability to secure the hospital occupation mix constant was examined. The difference between the fixed occupation mix Laspeyres and the current prospective payment system on average is very small 2% approx. nonetheless, the occupation mix deformations are very large for a small ratio of labour areas especially some found in the south. This paper then explains the occupational adjustments of the prospective payment system (PPS) wage index.
Employment, Inequality and the UK National Minimum Wage over the Medium‐Term*, Dolton, P., Bondibene, C. R., & Wadsworth, J. (2012). Oxford Bulletin of Economics and Statistics, 74(1), 78-106. This study examines the effects of the national minimum wage on inequality and employment in the United Kingdom over the last ten years since it has been introduced. An evaluation test was conducted to study the effect per annum by using an incremental differences-in-difference (IDiD) estimator. The identification according to this paper is based on the variation in the bite of the national minimum wage across the differently sized year on year uprating and the labour market. In a nutshell, this paper explains the employment inequality and the United Kingdom nation minimum wage over the medium time.