DEFINITION of 'Indexed Earnings'

A worker's past wages that have been adjusted for changes in the overall wage level in the economy. Indexed earnings are generally used in computing pension-type benefits. Since wage levels generally rise over time, a worker's earnings in the past must be adjusted so they can be measured against what the worker would have made at the present wage level.

BREAKING DOWN 'Indexed Earnings'

Social Security benefits in the U.S. are calculated using average indexed monthly earnings, a type of indexed earnings. Indexing earnings allows the Social Security Administration to award benefits which account for changes in standard of living. If earnings were not indexed in this manner, then retirees would receive much lower benefits that would be out of proportion to the true buying power of their earnings in prior years.

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