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handle is hein.crs/goveeoa0001 and id is 1 raw text is: Social Security: The Average Wage Index September 22, 2021 Background Recent news articles suggest a possible decrease in national average wages due to the recent recession caused by the Coronavirus Disease 2019 (COVID-19) pandemic. Such a decrease would have a negative impact on the Social Security benefits of individuals who reached age 60 in 2020. Social Security benefits are tied to a worker's earnings record but are also affected by changes in national wage levels, price levels, and claiming age. Congressional interest in this issue may be high because of the large number of potential beneficiaries for whom benefits would be affected by a decrease in average wages as measured by the Social Security Administration's (SSA's) average wage index (AWI). Many other parameters used by the SSA are adjusted automatically (typically on an annual basis) based on changes in national average wages. Projections for 2020 In July 2021, the Congressional Budget Office released its updated baseline projections, which included several projections for Social Security parameters. It estimates the 2020 AWI will be $54,036.00. This would represent a decrease of about 0.0012% from the 2019 AWI of $54,099.99. In August 2021, the Social Security Board of Trustees released its 2020 Annual Report. Under its intermediate assumptions-the best guess of future experience-the 2020 AWI will be $55,576.94. This would represent an increase of about 2.73%. In 2009, the only year in which AWI decreased, the index declined by 1.51%. Overview of AWl Some Social Security parameters are adjusted annually using the AWI. This adjustment ensures that the program parameters reflect changes in the national wage levels. The AWI is a dollar amount defined as the average of the total wages for such particular calendar year and is subject to regulations as prescribed by SSA's commissioner (42 U.S.C. §409(k)). Under current law, the commissioner is required to compute the average of total wages based on the amounts of wages reported by the Secretary of the Treasury, including wages above the contribution and benefit base (CBB). Wages above the CBB are not subject to the Social Security payroll tax and are not included in Social Security benefit computation. The AWI also includes certain deferred compensations (20 C.F.R. §404.211(c)(3)). H istory of AWl Among other things, the Social Security Amendments of 1972 (P.L. 92-603) and the Social Security Amendments of 1977 (P.L. 95-216) amended federal law to provide a wage- indexed benefit formula for initial benefits (i.e., benefits payable at the earliest eligibility age, or 62) and to provide for wage-indexed program parameters. All persons eligible for benefits after 1978 would have their benefits calculated under this new procedure. (AWIs for earlier years-1951 through 1977-were retroactively calculated.) The 1972 and 1977 amendments and implementation of the current wage reporting system in 1978 caused SSA to adopt a different computation method for future years. Under the new method, the amounts from an earlier year is a base to which percentage changes from the new raw earnings data are applied. Since this change was implemented, the AWI value for a given year has usually been greater than the raw earnings data. (In 2019 the average raw earnings were $51,916.27 per worker, but the AWI was $54,099.99.) Calculation of AW Under current law, a given year's AWI is computed using a three-step process. The first step uses the SSA raw earnings data. A year's aggregate net compensation-compensation plus contributions to deferred compensation plans less certain distributions that were included in reported compensation subject to income taxes-is divided by the number of workers for that year. In the second step, the raw earnings data for a given year is compared to the value from the prior year to determine the year-over-year percentage change in raw earnings data. In the third step, a given year's AWI is determined by applying the percentage change in the raw earnings data to the prior year's AWI dollar value. For example, in 2019 the aggregate net compensation ($8,790,916,517,299.29) was divided by the number of workers (169,328,746) to produce the per capita value of raw earnings data of $51,916.27. The 2019 raw earnings data was then divided by the 2018 raw earnings data ($50,040.96) to determine the percentage change in raw earnings: 3.75%. Lastly, this percentage change was applied to the 2018 AWI value of $52,145.80, which yielded the 2019 AWI value of $54,099.99. SSA annually publishes this calculation in the Federal Register. Typically, it takes about three quarters for SSA to collect the wage data and perform the necessary AWI calculations. The AWI calculations for 2019 were published in the Federal Register on October 22, 2020 (85 Federal Register 67413). Typically, overall economy-wide earnings increase over time. This results in a generally increasing AWI. In its 69- year history, the AWI has increased in all but one year (2009) and exhibited an average annual growth rate of 4.5%. For newly eligible workers, this leads to year-over- year increases in initial benefits and stable replacement rates (i.e., the portion of earnings that initial benefits replace). Program parameters that are indexed to AWI ittps://Crsreports.congress.gt

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