What are 'Indexed Earnings'

Indexed earnings is a calculation the Social Security Administration (SSA) uses that takes inflation into consideration when determining life-long wages. The amount someone collects from Social Security after retirement or disability after an injury is based on the wages made over a lifetime.

BREAKING DOWN 'Indexed Earnings'

For Social Security purposes, the indexed earnings are calculated, as explained on SSA.gov: “For each year prior to the last two years of current employment, an individual’s yearly wage is multiplied by an ‘indexed factor’ that increases the wage to account for inflation. For instance, for wages received in 1951, the SSA will apply an indexing factor of 15 or more and multiply this by the wages to determine the indexed earnings.”

The amount of disability payments (SSDI) a person is eligible for is based on average indexed monthly earnings. This is determined by taking the 35 highest years (prior to age 60) of indexed earnings and dividing that figure by the total number of months worked during those years.

Thus, if you worked every month, without fail, your average indexed monthly earnings would equal the sum of 35 years of work divided by 144 months.

The Significance of the Indexed Earnings Calculation

Making sure amounts are determined fairly and equitably for recipients of Social Security or disability is significant. Not factoring in inflation, thus lowering the wages benefits are based on, would certainly impact someone’s quality of life. A person might be forced to downsize from a larger home, cancel a planned vacation or stop contributing to their grandchildren’s education.

Social Security benefits in the U.S. are calculated using average indexed monthly earnings, a type of indexed earnings. Indexing earnings allow 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.

RELATED TERMS
  1. Social Security Administration ...

    The Social Security Administration (SSA) is a U.S. agency that ...
  2. Taxable Wage Base

    The taxable wage base is the maximum amount of earned income ...
  3. Substantial Gainful Activity - ...

    Substantial gainful activity marks the salary threshold used ...
  4. Wage Push Inflation

    Wage push inflation is a general increase in the cost of goods ...
  5. National Average Wage Index - NAWI

    The National Average Wage Index is a measure of U.S. wage trends ...
  6. Real Income

    Real Income is the income of an individual or group after taking ...
Related Articles
  1. Retirement

    How Social Security for Legal Immigrants Works

    If you, an immigrant, earn enough work credits in the U.S. – or combined with credits from certain other countries – you can claim benefits. Here is how.
  2. Retirement

    How Working After Retirement Affects Social Security

    Working after retirement can positively affect your Social Security benefits.
  3. Retirement

    Social Security Changes to Expect in 2018

    Here are the changes to the Social Security program set to take effect on Jan. 1, 2018.
  4. Retirement

    Common Questions About Social Security

    Find answers to the 10 Social Security questions that most people ask, from how to apply for benefits to how secure the system is.
  5. Retirement

    11 Social Security Calculators Worth Your Time

    The safest Social Security calculators to use when figuring benefits are on the official website. The best are the ones that access your actual record.
  6. Retirement

    Is Your Social Security Check Less Than You Thought?

    If you're counting on your Social Security check to cover financial gaps in retirement, you may be in for a shock if your benefits are less than expected.
  7. Retirement

    Social Security Benefits for Non-U.S. Citizens

    Social Security benefits, which are confusing for U.S. citizens, can become even more confusing for resident aliens and non-resident aliens.
  8. Retirement

    How Social Security Works After Retirement

    Millions of Baby Boomers are looking forward to collecting benefits, but several factors can affect how much they get and whether the money is taxed.
  9. Retirement

    The 3 Best Social Security Calculators For 2016

    Find out how to analyze your Social Security benefits under different retirement scenarios using multifunctional online Social Security calculators.
  10. Retirement

    Ready to Enroll in Social Security? Here's What You Need

    There are three ways to enroll in Social Security, all of which require a lot of information.
RELATED FAQS
  1. Are my Social Security disability benefits taxable?

    In some situations and in some states, your Social Security disability benefits are taxable. Read Answer >>
Trading Center