National Average Wage Index

Latest index
The national average wage index for 2006 is 38,651.41

Indexed earnings used to compute initial benefits
When we compute a person's retirement benefit, we use the national average wage indexing series to index that person's earnings. Such indexation ensures that a worker's future benefits reflect the general rise in the standard of living that occurred during his or her working lifetime.

When indexing an individual's earnings for benefit computation purposes, one must first determine the year of first eligibility for benefits. For retirement, eligibility is at age 62. If a person reaches age 62 in 2008, for example, then 2008 is the person's year of eligibility. An individual's earnings are always indexed to the average wage level two years prior to the year of first eligibility. Thus, for a person retiring at age 62 in 2008, the person's earnings would be indexed to the average wage index for 2006, or 38,651.41. Earnings in a year before 2006 would be multiplied by the ratio of 38,651.41 to the average wage index for that year; earnings in 2006 or later would be taken at face value. (See two examples of indexed earnings.)

Indexed program amounts
We use the average wage indexing series to update several amounts that are important to the operation of Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) program.

• OASDI contribution and benefit base (also known as the taxable maximum)
• Retirement earnings test exempt amounts
• Formulas for a primary insurance amount and maximum family benefits
• Amount of earnings needed to earn a quarter of coverage ("credit")
• "Old-law" contribution and benefit base (as determined under the law as in effect before the 1977 amendments)
• Coverage thresholds for both domestic employees and election workers
• Substantial gainful activity amounts for disabled beneficiaries

Determination of the National Average Wage Index for 2006
To determine the national average wage index for calendar year 2006, we increased the 2005 national average wage index of 36,952.94 by the percentage increase in average wages from 2005 to 2006, as measured by annual wage data tabulated by the Social Security Administration (SSA). The wage data tabulated by SSA are based on wages subject to Federal income taxes and contributions to deferred compensation plans.

The average amounts of wages calculated directly from the SSA data were $35,448.93 and $37,078.27 for 2005 and 2006, respectively. To determine the national average wage index for 2006 at a level that is consistent with the national average wage indexing series for prior years, we multiply the 2005 national average wage index of 36,952.94 by the percentage increase in average wages from 2005 to 2006 (based on SSA-tabulated wage data). In other words, the national average wage index for 2006 is 36,952.94 times $37,078.27 divided by $35,448.93, which equals 38,651.41.

The complete average wage indexing series is shown below.