The Social Security Administration (SSA) will factor in our highest wages over a 35-year work history, index those wages and calculate our benefit. But how do indexed earnings work, and can they help us understand why we get the benefit we get? For insight, let’s turn to the experts at Investopedia to help explain indexed earnings and how they factor into Social Security.
Indexation, the process used by the SSA, is when your average wage adjusts for changes in another economic factor. Indexed earnings, simply put, is a math equation that factors in inflation to help come up with your benefit amount. The SSA indexes our top 35 earning years, helping to factor in wage growth. That average becomes our benefit.
Our wages are indexed the year we are eligible for benefits. The indexed wages round to the average from two years of their eligibility. For example, if you turn 62 this year, your average wage index would reflect what you made when you were 60.
Inflation plays a major part in determining benefits. Indexing wages need to factor in inflation, so to keep the wage average used to calculate benefits fair and equal. Failing to factor inflation means everyone’s average benefit would naturally decrease over time.
There are different ways to increase your benefits, and by understanding the math better we can use that to our advantage. The Council for Retirement Security wants to protect senior benefits. Join in the Council’s fight today to see how you can help protect Social Security for years to come.