About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline
LOG IN
LOG IN

1 1 (July 13, 2020)

handle is hein.crs/govdash0001 and id is 1 raw text is: July 13, 2020 Social Security Benefits and the Effect of Declines in Average Wages and Prices Recent news articles have highlighted how a decrease in national averagewages may have a negativeimpact on the Social Security benefits ofindividuals reaching age 60 in 2020. Social Security benefits are tied to a worker's earnings record but are also affected by changes in national wages and prices. This InFocus explains elements ofthe benefit formula, dis cusses the possible effects ofdeclining average wages and prices on benefits, andreviews policy options for Congress. Congressional interest may be high because ofthe large number o fpotential Social Security beneficiaries forwhomthese benefits would comprise a big share oftheirtotal income. Average monthly Social Security benefits generally increase because of wage-indexingandprice-indexing. Initial benefit amounts (i.e., retired workerbenefit amounts that can be collectedat the earliest eligibility age of 62) are indexed to the average wage index(AWI). Benefit amounts collected afterthe earliest eligibility age are indexed to the ConsumerPrice Indexfor Urban Wage Earners and Clerical Workers (CPI-W) through an annual cost-of-living- adjustment (COLA). Although wages andprices generally increase overtime, instances may arise where wages, prices, orboth decrease. Under such conditions, as may result fromCoronavirus Disease2019 (COVID-19) circumstances, benefit amounts would be affected. Workers become eligible for Social Security benefits by working in covered employment, generally requiring about 10 years ofwork, and are first eligible for Social Security retirement benefits at age 62. To determine benefits, the same process is us ed for allbeneficiaries. Lifetime earnings are wage-indexed to account for growth in economy-wide earnings overa worker's career. Depending onthe yearof birth (i.e., birth cohort), two workers with identical earnings profiles may have different wage-indexed amounts. The benefit formula process first determines a worker's Average Indexed Monthly Earnings (AIME). The AIME computation updates a worker's past earnings to account for growth in overall economy-wide earnings. This is doneby indexing each year o fa worker's taxable earnings by the growth in the AWI. Given lag time in computing theAWI, earnings up to age 60 are wage-indexed, whereas earnings from later years -at ages 60 and above-are not. For example, the Social Security average wage grewby29.6% between 2000and 2010 (from $32,155 to $41,674). As a result, a workerwho turned 60 in 2010 and earned$20,000 in 2000 would have wage-indexed earnings of $25,921 ($20,000* 1.296) for 2000. As such, growth in the AWI during the yearin which a workerturns 60 is an important part ofthe benefit calculation. Once annual earnings before age 60 are indexed, the AIMEis obtainedby dividing the total ofthe highest 35 years of indexed earnings by 420 (i.e., total months in 35 years). Next, the benefit formula process computes a worker's Primary Insurance Amount (PIA)-the basic monthly benefit fora retired workerwho begins to receive benefits at the full retirement age (i.e., 67 for those born in 1960 and later). Using two bendpoints, which are also adjusted annually for average wage growth in the economy, a worker's AIMEis s ectionedinto three brackets of earnings. A fixed PIA factor-90%,32%, and 15%, respectively-is applied to each bracket of an AIME. The PIA factors ae set in statute. The bend points are basedon theyearan individualis first eligible for Social Security benefits (i.e., age 62). However, given the lag time in computing the AWI, the value fromtwo years prioris us ed to determine the bend points (i.e., when the workerwas age 60). For example, in 2010, the bend points were $761 and $4,586. In 2011, due to a decrease in the AWI in 2009, the bendpoints decreasedto $749 and $4,517. This is a second area in which the AWI value during the year in which a worker turns 60 plays an important role in determining a worker's benefit amount. Benefits paid after age 62 are increased annually by a COLA basedon changes in the CPI-W. To compute the AIME, earnings are indexed to growth in the AWI. Bend points used to compute thePIA are also indexed by growth in the AWI. Thus, fromyear-to-year, average benefits for new beneficiaries increase at approximately the same rate as average wages in the economy. This has generally resulted in stable replacement rates -the portion o fa worker's career-averaged earnings that Social Security benefits replace. Overits history, theAWI has increased in allbut one year (2009), at an average annualrate of4.5%. All else being equal, initial benefits generally increase overtime. However, underthe current-law benefit formula, a decrease in the AWI in the yeara workerturns 60would result in a lower AIMEthan ifthe wage growthwere to increase or remain level. The same is true forthe bend points usedin the PIA calculation. That is, those turning age 60 during a year in which there was a decrease in the AWI would receive a lower PIA than ifwages were to followthe generally positivetrend. For example, considera hypothetical median earnerwho earnedat the median AWI level for each year o femployment and turned 60 in 2013. Such a workerwould have an AIME of $3,749.47 and a PIA of $1,658.60. Assuming an arbitrary decrease of 5% in the AWI forthat year, the same workerwould have an AIMEof$3,576.00 and a PIA of $1,579.80. Before COLA k yg

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Short-term subscription options include 24 hours, 48 hours, or 1 week to HeinOnline.

Purchase Access

Contact us for annual subscription options:

Contact Us

Already a HeinOnline Subscriber?

Log In

profiles profiles most