Today's Social Security column addresses questions about what effects a potential drop in the 2020 Average Wage Index might have on benefit amounts and timing, survivor's benefits and the. National Average Wage Index and Wage Indexing Wage indexing is used by Social Security to adjust. Social Security uses the National Average Wage Index (NAWI) to determine the indexing factor for each year. The OASDI tax rate for wages paid in 2022 is set by statute at 6.2% for employees and employers, so an individual with wages equal to or larger than $147,000 would contribute $9,114 to the. While you can choose to pay them directly yourself, most insurers get paid directly from your Social Security Benefit. Over the years our calculators have helped thousands of clients maximize their Social Security benefits while helping to shift the general thinking about when to claim. Despite the programs enduring popularity, many potential beneficiaries have no idea how much money they can count on from Social Security once they retire. A locked padlock The AWI measure of the number of employees should, and does, vary much less than the average number of employees at any point in the year, like we get from using the establishment employment survey or the QCEW (which also measures employees along with wages). Its accuracy and completeness is not guaranteed and all warranties express or implied are hereby excluded. Social Security Encore Encore Opinion: A drop in Social Security's Average Wage Index could hurt four million people Published: Sept. 12, 2020 at 12:35 p.m. and applicable copyright laws. In addition, the national average wage index for 2019 is $54,099.99. Most of the uncertainty in the measure for 2020 appears to be on the employment side of the calculation. You may receive slightly larger benefits by waiting, but if poor health may limit your longevity, you may be better off taking payments as soon as you can. Are you sure you want to rest your choices? 1: The AIME calculation The reason those born in 1960 will likely see smaller Social Security checks is because of the average wage index (AWI). This is where I took the most important rules and things to know from the 100,000 page Social Security website and condensed it down to just ONE PAGE! . That would equate to: Select the highest years of indexed and unindexed earnings to serve as Computation Years (CY) in the amount of the number of BY, Add the indexed and unindexed earnings in the CYs to come up with the dividend, Round the Average Indexed Monthly Earnings down to the nearest ten cents, This page was last edited on 15 March 2023, at 10:42. So, I get an expectation of about 1.0 percent increase in the AWI by combining expected wage growth of 1.5 percent and employment growth of 0.5 percent. For visual learners (as most of us are), this is where I break down the complex rules and help you figure out how to use them to your advantage. In 2018 they were $50,000.44. These estimates are derived from the "intermediate" assumptions in the 2023 Trustees Report. (Excuse the stereotypical sexist language, but it usually is the husband who runs the business and the wife who has low or no earnings for Social Security.) 2023 Forbes Media LLC. ): Social Security COVID Correction and Equity Act. Official websites use .govA Average Indexed Monthly Earnings SSA provides data for both sides of that equation, so we can see how, in gross terms at least, the AWI increased in 2020. This will result in a ratio thats commonly called the indexing factor. Average indexed monthly earnings (AIME) are used to calculate the primary insurance amount (PIA), which is used. You can see the calculation details on the Social Security website. The numerator is the total wages earned in the economy over the year, $ 475,000 ($225,000 + $220,000). You asked how much that index changed from 2019 to 2020, according to the Congressional Budget Office's estimate. This was an increase of 3.62%. The Social Security Administration (SSA) released the AWI measure for 2020 yesterday, and instead of dropping, the AWI rose by about 2.8 percent in 2020, just about the average of the 2010-2020 period (see chart below). This is equivalent to an AIME of $10,503, which itself is roughly equal to having an average annual salary of about $126,000. You can even add onto your base amount by delaying when you start benefits. You can start claiming Social Security benefits early as age 62, the current early retirement age. defined by the Social Security Administration, maximum earnings taxable for Social Security. With those taxes in there, no damn politician can ever scrap my Social Social Security program, Social Security Trustees Project Trust Fund Exhaustion in 2034, One Year Earlier Than Last Year, Savvy Social Security Calculators Rated #1 in User Satisfaction, There Are Only Two Ways to Fix Social Security: Cut Benefits or Raise Revenues, Bernie Sanders Submits New Social Security Reform Proposal, Social Security and Medicare Cuts off the Table. The Centers for Medicare and Medicaid Services (CMS) has proposed a rule doing away with unnecessary coverage delays following Medicare enrollment. As more and more information becomes available about economic activity in 2020, our estimate of the AWI has been rising. Types of wage-indexed amounts are listed below. Wage-Indexed Amounts Although this is a fairly obscure part of the Social Security system, it is still used for certain determinations within the Railroad Retirement program, the Pension Benefit Guaranty Corporation, the eligibility calculation for Social Securitys special minimum benefit, and finally, for determining the amount of earnings deemed as substantial for purposes of the Windfall Elimination Provision. We may see this in this year or the next, as Depression-era unemployment numbers caused by the global COVID-19 pandemic work their way through the system. Indexed earnings are generally used in computing pension-type benefits. In other words, if you start Social Security earlier, youll probably claim it for longer; someone with the same lifespan who delayed payments would claim them for less time. Prior to the benchmark year, your benefits are increased based on changes to national wages. Please try again later. Thus, growth in the AWI roughly equals the growth in wages and salaries minus the growth in the number of employees. As more and more information becomes available about economywide wages and salaries in 2020, our expectation for AWI growth keeps getting larger. The Social Security Administration (SSA) will tabulate information from tax filings and announce the AWI probably in October. As stated earlier, that is just about the average increase over the past decade, but as we have highlighted, the components of the change were anything but normal, as both total wage growth and the number of employees dropped. It's particularly important for calculating the future benefits for people turning age 60. This year SSA asked for an anomaly of $800 milion over and above the $13 billion the agency received last year. The Old-Law base will only change in years where there is a cost of living adjustment, and this amount cannot decrease. But national wage growth didnt fall like in 2009, at the worst of the previous recession. The Old-Law Contribution and Benefit Base is the maximum taxable earnings base that would have been effective without the enactment of the 1977 amendments to the Social Security Act. Earnings in a year before 2021 would be multiplied by the ratio of 60,575.07 to the average wage index for that year; earnings in 2021 or later would be taken at face value. It's. The culprit once again is the "Average Wage Index" (AWI), which is an obscure linchpin within the mechanics of Social Security that determines how much you will get taxed and how much you will get paid. Years with low inflation may lead to no COLA increase. Then you take these 35 years, sum them, and divide the total by 420. By law, all covered workers who attain age 62 in 2006 must be treated the same with respect to wage indexation so the 2004 figure for national average wage must be used for the entire 2006 year. Conversely, someone in excellent health who expects to live substantially longer than average may make more total by waiting until 70 to start Social Security benefits. Using this wage data helps ensure that benefit payments reflect the general rise in the standard of living that occurred during an individual's working lifetime. It seems too early to predict with much accuracy the 2021 average wage index, but perhaps after we get the third quarter NIPA report at the end of the month, well start getting some early hints of the broad range of possible outcomes. Now that you have your AIME, youre ready to determine the heart of your benefit, or your primary insurance amount (PIA). Offices tend to be the busiest first thing in the morning, early in the week, and during the early part of the month, so clients may want to plan to visit at other times. You can avoid these surcharges on your PIA, of course, simply by waiting to start payments until your full retirement age. They now project that the combined OASDI Trust Fund will exhaust in 2034, after which payroll taxes will be sufficient to pay 80% of promised benefits. So a parent who owns a business may put the child on the payroll in order to make them eligible for IRA contributions. This is generally between ages 66 and 67, depending on when you were born. Your benefits may actually increase from year to year. The government calculates this. A reasonable range for my estimate of AWI growth for 2020 would be somewhere between flat and a 2 percent increase. Employment for AWI purposes is the number of employees who received W-2s, regardless of how much they worked. It estimates the 2020 AWI will be $54,036.00. To calculate this number, the Social Security Administration uses the following formula: (AWI from two years ago / 1976 AWI) x $250 (1978 earnings required for a credit). Instead, theyre based on the year over year changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). A person who is earning more than a certain monthly amount (net of impairment-related work expenses) is ordinarily considered to be engaging in SGA. Ask Larry: Will Congress Fix The Calculation Problem Caused By - Forbes The Average Indexed Monthly Earnings (AIME) is used in the United States' Social Security system to calculate the Primary Insurance Amount which decides the value of benefits paid under Title II of the Social Security Act under the 1978 New Start Method. [], [] reductions to the Average Wage Index. The latest proposal to be analyzed by SSAs office of the chief actuary is Angie Craigs (D-MN) You Earned It, You Keep It proposal (H.R. For earnings that fall within the second band, you multiply by 32%. Would love your thoughts, please comment. From time to time Ill even drop in to add my thoughts, too. If you make more than $21,240 in 2023, for every $2 over the limit $1 of your Social Security benefit will be withheld. A coverage threshold is the dollar amount of earnings that triggers Social Security coverage. She is the author of four books, including End Financial Stress Now and The Five Years Before You Retire. Covid-19 Side Effect: Social Security Retirement Benefits For - Forbes For example, if you turn 62 in 2020, the AWI data from 2018 will be used to determine the bend points used in your calculation. According to the projections, Bernies plan would restore full solvency to the Social Security system for at least the next 75 years. To obtain the earnings test for years before full retirement age, use this formula: (AWI from 2 year ago / 1992 AWI) x $670 (1994 earnings test amount). One last thing, be sure to get your FREE copy of mySocial Security Cheat Sheet. Earnings in all years prior to two years before the current year are indexed for inflation. The index is 8.89 percent higher than the index for 2020. So the average wage index rose by 2.8% . If your income is higher, you dont qualify for that subsidy and have to pay a greater portion of your own premiums. If you were working a full-time job, that equates to being paid about $10.50/hour. Emily Guy Birken is a former educator, lifelong money nerd, and a Plutus Award-winning freelance writer who specializes in the scientific research behind irrational money behaviors. Post-Election Social Security Cuts Less Likely Now, Social Security announces 8.7% COLA for 2023, House Democrats Call For Action on Social Security Reform, urge action on a bill to expand Social Security, Most Voters Want Congress to ExpandNot Cut or PrivatizeSocial Security, Sanders/DeFazio Bill Would Restore Solvency and Raise Benefits. My best estimate at this point is that the national average wage index (AWI) for Social Security purposes rose by about 1 percent in 2020, which would be a much better performance than some experts projections last year for a significant decline, and better than the small 0.5 percent decline estimated most recently (in January) by the Congressional Budget Office (CBO). What Is the Average Social Security Check? - SmartAsset License: Creative Commons CCZero Downloads & Resources Social Security: What Is the Wage Base for 2023? - Yahoo The report shows little change from recent years. When changes occur, theyre not always represented by increases. The earnings required for one credit cannot decrease. There are two separate formulas that the Social Security Administration uses here: The formula for domestic employees is as follows: (AWI from two years ago / 1993 AWI) x $1,000 (1995 threshold). Prior to the 1972 Social Security Amendments, changes to the various components of the benefit program were determined by Congressional action. If the calculation reflects a decrease, SGA will not change from one year to the next.