Introduction to the National Average Wage Index (NAWI)
The National Average Wage Index (NAWI) serves as a key measure of wage trends in the United States, computed annually by the Social Security Administration (SSA). It is primarily influenced by income subject to federal income taxes and contributions to deferred compensation plans.
Empowering Financial Stability: The Role of NAWI
The SSA utilizes the NAWI to adjust retirement and insurance benefits periodically in the U.S., as well as to update several operational factors within the Old-Age, Survivors, and Disability Insurance (OASDI) program.
Key Takeaways
- Tracking Wage Growth: The NAWI serves as a critical index for understanding wage trends among American workers and constitutes an important measure of inflation.
- Annual Computation: SSA calculates the NAWI annually, allowing for tailored adjustments to Social Security benefits and contributions that account for inflation changes.
- Indexing Retirement Benefits: For Social Security purposes, the wages of an individual are indexed to the NAWI the year they turn 60, despite eligibility starting at age 62.
- Example Calculation: The 2021 National Wage Index, for instance, is determined by multiplying the 2020 average wage by the percentage change in average wages from 2020 to 2021.
Illuminating Wage Trends: Understanding NAWI
Providing unparalleled insight into wage trends, the NAWI can alert policymakers to potential wage inflation, influencing decisions by the Federal Reserve regarding interest rate adjustments. Raising interest rates usually has a negative impact on both bond and equity markets while addressing inflation. Conversely, a decrease in wage inflation might push the Federal Reserve to lower rates, thus stimulating the economy and labor market.
[wage push inflation](overall rise in the cost of goods due to increased wages) results in price increases for goods and services as companies aim to maintain profitability. This leads to a circular effect where higher wages increase the cost of consumer goods, compelling workers to demand even higher wages as a response.
Example of NAWI Calculation
For illustrational purposes, calculating the NAWI for 2021 involves multiplying the 2020 NAWI by the change in wages from 2020 to 2021. Detailed wage data spanning from 1951 to the present year is maintained on the SSA website.
Example
The national average wage index for 2021 stands at $60,575.07, showing an 8.89% increase compared to 2020.
National Average Wage Index and Wage Indexing
To ensure retirement benefits are aligned with inflation, wage indexing is implemented by Social Security. Individuals become eligible for benefits at age 62, but earnings are indexed to the wage level in the year they turned 60. This indexing helps adjust past earnings to reflect current wage levels more accurately.
Example: If an individual earned $30,000 in 1990 and turned 62 in 2020, with the NAWI in 2018 at $52,145.80 and $21,027.98 in 1990, the index factor would be 2.48 ($52,145.80 / $21,027.98). The inflation-adjusted earnings for 1990 would be approximately $74,400 ($30,000 x 2.48).
Due to the dependence on NAWI, exact Social Security benefits won’t be ascertainable until age 62, but predictions can be made by considering wage inflation.
Final Thoughts: Empowering Your Financial Future
Calculated annually by the SSA, the National Average Wage Index tracks U.S. wage growth and trends profoundly influencing Social Security benefits and policy decisions on interest rates. Understanding NAWI helps in planning effectively for a financially stable and secure retirement.
Related Terms: Social Security, inflation, wage indexing, economic stimulus.
References
- Social Security Administration. “National Average Wage Index”.
- Social Security Administration. “Indexing Factors for Earnings”.
- Federal Reserve Board. “How Does the Federal Reserve Affect Inflation and Employment?”
- Social Security Administration. “National Average Wage Index”.
- Social Security Administration. “National Average Wage Index”.
