SOCIAL SECURITY ADMINISTRATION
Office of the Chief Actuary
AVERAGE WAGES FOR INDEXING UNDER THE SOCIAL SECURITY ACT
AND THE AUTOMATIC DETERMINATIONS FOR 1979-81
by Eli N. Donkar, Ph.D., A.S.A.
|CONSTRUCTION OF THE 1951-77 AVERAGE WAGE SERIES|
|1.||Historical precedents for wage indexing and average wage|
|2.||The preliminary series of average wages|
|3.||Limitations on other historical sources of data available from SSA|
|4.||The construction of the final average wage series for 1951-77|
|5.||The final series—indications of reliability|
|AVERAGE WAGES FOR 1978 AND 1979|
|1.||Sources of data for years after 1977|
|2.||IRS wage data for 1977-79|
|3.||Average wages for indexing, 1977-79|
DETERMINATION OF WAGE-INDEXED PROGRAM AMOUNTS FOR 1979-81
As mentioned in the introduction to this paper, the series of average wages serves a second purpose under the Social Security Act. In addition to its use in indexing earnings for purposes of benefit calculations, the average wages are used in the annual automatic determinations of various program parameters. Under Sections 203, 213, 215, and 230 of the Act, the Secretary of Health and Human Services is required to determine annually the following amounts:
In general, these formulas require that the given amounts vary according to changes in average wages that are measured from some specified base years through the year which falls two years before the year for which the automatically determined amounts will become effective. Thus, for example, each of the recently determined amounts effective for calendar year 1981 depends on certain increases in average wages measured through 1979. This two-year lag is merely the resolution of the technical problem of the delay in the collection of the annual wage data. The determination of the average wage figure for a given year and the corresponding automatic adjustments of program amounts thus normally take place in October of the year following the year for which the average wage is being determined (which is the year that precedes the effective year for the determined program amounts). The average wage amount and the corresponding items listed in 1-4, above, are published in the Federal Register (usually by November 1 preceding the effective year for the determined amounts) as required by law. There is no legal requirement to publish an announcement of the determination of the "old law" base (item 5 above), which has a more limited use under the Act. Nevertheless, an official announcement is usually made in the Federal Register at some later date.
In the following sections we describe each of the automatically adjusted program amounts and give the details of the automatic adjustments that have taken place since the 1977 Amendments. Before describing the various indexing procedures, it should be noted that there are two slightly different concepts being used. In one case (the contribution and benefit bases and the retirement test exempt amounts), the indexing is a stepwise year-to-year procedure with the newly adjusted amounts for a given year being determined from wage increases applied to the amount in effect for the preceding year. In the other case (the quarter-of-coverage amount and the formula bend points), the indexing is accomplished by applying the appropriate wage increases to fixed base year amounts. For the quarter-of-coverage amount, the base year is 1978; while for the formula bend points, the base year is 1979. Of course, because of the multiplicative nature of the indexing procedures, the differences resulting from the application of these two methods are due entirely to the cumulative effects of the rounding methods specified in the law.
1.The retirement test exempt amounts
Under the social security program, the retirement test annual exempt amount is the maximum amount that a social security beneficiary, who is subject to the retirement test, may earn in a year and still receive all of his or her benefits for the year. The corresponding monthly exempt amount is equal to one-twelfth of the annual amount and is used in the operation of the monthly retirement test. Under the monthly test, regardless of the amount of an individual's annual earnings, that individual (and any other person entitled to benefits based on such individual's earnings) may receive the entire benefit for any month that is both (1) a month for which the individual is entitled to benefits and (2) a month in which the individual does not have earnings in excess of the monthly exempt amount. Under a provision in the 1977 Amendments, the monthly retirement test generally applies only in the first year in which such a month occurs, although recent revisions to the law contained in Public Law 96-473 provide for certain exceptions to this rule.
The 1977 Amendments also provided a higher retirement test exempt amount for beneficiaries aged 65 and over than for beneficiaries under age 65. For beneficiaries aged 65 and over, the annual retirement test exempt amount specified in the law is $4,500 for 1979, $5,000 for 1980, $5,500 for 1981, and $6,000 for 1982. After 1982 it is subject to the automatic increase provision in Section 203(f)(8) of the Act. This section also provides for automatic increases in the retirement test exempt amount for beneficiaries under age 65, and is applicable in determining the exempt amounts for such beneficiaries effective for each year 1979-81. The section further provides that automatic increases in the exempt amounts become effective in a year only if an automatic cost-of-living increase in social security benefits became effective in the preceding year. Under Section 215(i), automatic cost-of-living benefit increases of 6.5, 9.9, and 14.3 percent became effective for June 1978, 1979, and 1980, respectively. Thus, for each of the years 1979-1981, the retirement test monthly exempt amount for persons under age 65 was determined according to the automatic increase provisions. That is, the determined retirement test monthly exempt amount for the given year was obtained by multiplying the corresponding amount for the preceding year by the ratio of the average wage for two years before the given year to the average wage for three years before the given year, with the resulting product being rounded to the nearest multiple of $10. The corresponding annual exempt amounts were determined in each case as 12 times the monthly amount.
Since the retirement test monthly exempt amount for persons under age 65 for 1978 was $270, the three determinations made since the 1977 Amendments have been calculated as follows:
|1979:||$270 x ($9,779.44/$9,226.48) = $286.18|
or $290 to the nearest multiple of $10
|1980:||$290 x ($10,556.03/$9,779.44) = $313.03|
or $310 to the nearest multiple of $10
|1981:||$310 x ($11,479.46/$10,556.03) = $337.12|
or $340 to the nearest multiple of $10
2.Amount of earnings required for a quarter of coverage
A quarter of coverage is the basic unit for determining a worker's insured status under the social security program. The 1977 Amendments provide that in any calendar year after 1977 an individual will be credited with one quarter of coverage up to a total of four, for each multiple of a specified amount of wages and self-employment income earned in that year. The specified amount for calendar year 1978 was $250. The amounts for years after 1978 are determined under the automatic provision in Section 213(d)(2). That section provides that for a given year after 1978, the amount required for a quarter of coverage is determined by multiplying the 1978 amount of $250 by the ratio of the average wage for two years before the given year to the average wage for 1976, with the resulting product rounded to the nearest multiple of $10. Thus the three amounts determined since 1978 have been calculated as follows:
|1979:||$250 x ($9,779.44/$9,266.48) = $264.98|
or $260 to the nearest multiple of $10
|1980:||$250 x ($10,556.03/$9,226.48) = $286.03|
or $290 to the nearest multiple of $10
|1981:||$250 x ($11,479.46/$9,226.48) = $311.05|
or $310 to the nearest multiple of $10
3. Bend points in PIA formula and maximum family benefit formula
The formula used to compute an individual's PIA is based on the individual's AIME. For persons newly eligible for benefits in 1979, the formula is:
90 percent of the first $180 of AIME, plus
32 percent of AIME in excess of $180 but not in excess of $1,085, plus
15 percent of AIME in excess of $1,085.
The bend points in the 1979 PIA formula are the two AIME figures $180 and $1,085. For persons newly eligible for benefits in 1980 or later, the bend points are determined under the automatic provision in Section 215(a)(1)(B). (Section 215(a)(1)(C) further provides that no PIA may be less than the larger of $122 or the so-called "special minimum" PIA determined under Clause (i)(II) of the section.)
The formula used to compute the maximum amount of total monthly benefits payable on the basis of the earnings of an individual is based on the individual's PIA. For persons newly eligible for benefits in 1979, the formula is:
150 percent of the first $230 of PIA, plusThe bend points in the 1979 maximum family benefit formula are the three PIA figures: $230, $332, and $433. For persons newly eligible for benefits in 1980 or later, the bend points are determined under the automatic provision in Section 203(a)(2).
272 percent of the PIA in excess of $230 but not in excess of $332, plus
134 percent of the PIA in excess of $332 but not in excess of $433, plus
175 percent of the PIA in excess of $433.
The sections cited above provide that, for a given year after 1979, each of the bend points in the benefit formulas must be determined by multiplying the corresponding bend points in the 1979 benefit formulas by the ratio of the average wage for the calendar year two years before the given year to the average wage for 1977, with the resulting products being rounded to the nearest dollar.
Thus, the appropriate average wage ratio is $10,556.03/$9,779.44 for determining the 1980 bend points and $11,479.46/$9,779.44 for determining the 1981 bend points. Multiplying the bend points in the 1979 benefit formulas by the appropriate average wage ratio resulted in the following bend points for the 1980 and 1981 benefit formulas:
|Product of 1979
bend points and
average wage ratio
|Bend points for|
|First bend point||$180||$194.29||$211.29||$194||$211|
|Second bend point||1,085||1,171.16||1,273.61||1,171||1,274|
|Maximum family benefit formula—|
|First bend point||230||248.26||269.98||248||270|
|Second bend point||332||358.36||389.71||358||390|
|Third bend point||433||467.38||508.27||467||508|
It should be noted that the recently enacted Disability Amendments of 1980 (Public Law 96-265) provide for a modification to the calculation of the maximum family benefits described above in the case of a disabled worker eligible for benefits after 1978 who was never entitled to disability benefits before July 1980. Under these provisions, the maximum family benefit is calculated as the lesser of (1) 85 percent of the worker's AIME, or (2) 150 percent of the worker's PIA, but no less than 100 percent of the worker' PIA.
4. Contribution and benefit base
The contribution and benefit base is the maximum annual amount of earnings on which an employee or a self-employed person must pay social security tax contributions. It is also the maximum annual amount which may be credited toward benefits in computing the amount a beneficiary may receive under the social security program. As modified by the 1977 Amendments, Section 230(c) of the Act specifies the amount of the contribution and benefit base in effect for each year 1978-81. The amounts specified were $17,700, $22,900, $25,900, and $29,700 for 1978-81, respectively. For calendar years after 1981, the contribution and benefit bases are again to be determined under the automatic increase provisions of Section 230(b).
5. Contribution and benefit base under provisions in "old law"
The 1977 Amendments modified Section 230 of the Act by substituting ad hoc increases in the contribution and benefit base in each year 1979-81 that were larger than the increases that would have otherwise resulted from the automatic increase provisions of the law. However, each year, under Sections 215(a) and 230(c) and (d), the contribution and benefit base that would have been effective in the following year, under Section 230 as in effect before the 1977 Amendments, must be determined. The provisions under prior law specified that the base for a given year would be determined by multiplying the base for the prior year by the ratio of the average wage for two years before the given year to the average wage for three years before the given year, with the resulting product being rounded to the nearest multiple of $300.
The contribution and benefit base for 1978 was specified in the Act by the 1977 Amendments to be $17,700, which was the same amount that was determined to be in effect under the automatic increase provisions of prior law. Thus, the "old law" bases in effect for years 1979-81 were determined as follows:
|1979:||$17,700 x ($9,779.44/$9,226.48) = $18,760.79
or $18,900 to the nearest multiple of $300
|1980:||$18,900 x ($10,556.03/$9,779.44) = $20,400.86
or $20,400 to the nearest multiple of $300
|1981:||$20,400 x ($11,479.46/$10,556.03) = $22,184.57
or $22,200 to the nearest multiple of $300
The "old law" base is used for the given year in crediting workers with a "year of coverage," for the purpose of computing special minimum benefits payable under Section 215(a). A worker who has covered earnings in a year amounting to at least 25 percent of the "old law" base for that year is credited with a year of coverage for the year.
Under Sections 230(c) and (d), the "old law" base for a year is also used for certain purposes under the railroad retirement program and under the Employee Retirement Income Security Act of 1974 (ERISA). Under the railroad retirement program, the "old law" base is used for purposes of determining:
a. Employer tax liability under Section 3221(a) of the Internal Revenue Code of 1954; b. The portion of the employee representative tax liability under Section 3211(a) of the Internal Revenue Code of 1954 which results from the application of the 9.5-percent rate specified therein; and c. Average monthly compensation under Section 3(j) of the Railroad Retirement Act of 1974, but not annuity amounts determined under Sections 3(a) or 3(f)(3) of such Act.
Under ERISA, the "old law" base for a year is used to index from 1974 the $750 per month maximum pension benefit guaranteed by the Pension Benefit Guaranty Corporation for benefit plans terminating in the year, as provided under Section 4022B of ERISA as amended by Public Law 96-364.
|Relevant Federal Register Publications|
|1.||Average wage series for indexing earnings under the Social Security Act, calendar years 1951-79|
|2.||Social Security program amounts determined under the automatic provisions which depend on increases in average wages, calendar years 1978-81|
|3.||First-quarter averages used in constructing the preliminary indexing series, calendar years 1951-77|
|4.||First-quarter averages used in constructing the final indexing series, calendar years 1951-77|
|5.||Average wages, percentage increases and indexing factors resulting from the preliminary average wage series, the final average wage series, and an average wage series derived from Department of Commerce (DoC) estimates, calendar years 1951-77|
|6.||Number of "wage items" per employee tabulated from the 1-percent sample LEED file, calendar years 1957-73|
|7.||Average wages for the first quarter for private industry population covered by unemployment insurance, calendar years 1951-75|
|8.||Estimated amounts of Average Indexed Monthly Earnings for maximum wage earners retiring at age 62 in each year 1979-90, calculated using three different wage series for indexing|
|9.||Summary of wage data tabulated by the Internal Revenue Service from individual tax returns filed for tax years 1977-79|
Notes published in the 1980s