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.
The Social Security Act has provided for indexing certain amounts under the old-age, survivors, and disability insurance (OASDI) program according to changes in average wage levels beginning, on a limited basis, with the Social Security Amendments of 1965. Legislation enacted in 1972 broadened the use of such indexing procedures to include automatic increases in the contribution and benefit base, in conjunction with the automatic cost-of-living increases in benefits that were provided in the 1972 Amendments. The 1977 Amendments further extended the use of indexing by providing for an indexed benefit structure.
Under the OASDI program as amended in 1977, all persons newly eligible for benefits after 1978 have their benefits computed under a procedure which calls for indexing each year of their earnings taxable under social security to reflect the changes in levels of average wages in the economy from that year to a point two years before their current eligibility. Increases in average wages are also used to index the "bend points" in the formulas for computing primary insurance amounts (PIA's) and maximum family benefit amounts, as well as several other program amounts such as the contribution and benefit base, the retirement test exempt amount, and the amount of earnings required for a quarter of coverage.
The law provides for annual publication in the Federal Register of all newly determined amounts under these indexing procedures. (See list of relevant Federal Register publications at end of text.) However, because of the wide-ranging use of the amounts determined under wage indexing, it has been suggested that more detailed information on the average wage series and the related automatic determinations should be documented for permanent reference and made available to the interested public. The purpose of this Actuarial Note is to provide such information. It is planned that a similar Actuarial Note will be an annual publication appearing soon after the official announcement of the determinations in the Federal Register.
In this initial paper, the retrospective determination of the wage indexing series for 1951-77 is documented, as well as the calculations of the 1978 and 1979 average wage figures used to extend the 1951-77 series (Table 1). In addition, the details of the automatic determinations of program amounts for 1979-81 which depend on these average wage figures are presented (Table 2).
|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|
|1.||The retirement test exempt amounts|
|2.||Amount of earnings required for a quarter of coverage|
|3.||Bend points in PIA formula and maximum family benefit formula|
|4.||Contribution and benefit base|
|5.||Contribution and benefit base under provisions in "old law"|
|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