Will the President’s Proposal Solve Social Security’s Crisis?

Policy Reports | Social Security

No. 280
Wednesday, November 16, 2005
by Andrew J. Rettenmaier and Thomas R. Saving


Past earnings are indexed by a wage index which is calculated for each new group of retirees based on past average Social Security wages. The wage index is set to 1 for the year in which the retiree turns 60. Prior years’ index equals the ratio of the average Social Security wage in the year in which the retiree turns 60 divided by the average Social Security wage in those years. For ages above 60 until retirement, the index is set to 1; thus, earnings in these years are not indexed. This wage index in each year is then multiplied by the retiree’s annual earnings in each year up to the retirement year. The highest 35 of these indexed annual earnings amounts are determined and then added together. If a worker has fewer than 35 years of labor force participation the missing years are filled in with zeros. The sum of the 35 highest annual earnings is then divided by 420, the number of months in 35 years, to determine the worker’s average indexed monthly earnings or AIME.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.

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