What Is the National Average Wage Index?
The National Average Wage Index (NAWI) is a measure of U.S. wage trends calculated annually by the Social Security Administration (SSA). The NAWI is dependent on income subject to federal income taxes and contributions to deferred compensation plans.
The SSA primarily uses the National Average Wage Index to index retirement and insurance benefits in the United States. It is also used to update several factors in the operation of the Old-Age, Survivors, and Disability Insurance (OASDI) program.
- The National Average Wage Index (NAWI) tracks wage growth among American workers as a measure of inflation.
- The NAWI is computed by the Social Security Administration each year in order to make adjustments to Social Security benefits and contributions, which are pegged to inflation.
- For purposes of Social Security benefits and taxation, a person's wages are indexed to the NAWI the year they turn age 60.
Understanding the NAWI
The National Average Wage Index provides insight into the direction of wage trends and may alert policymakers to wage inflation, which might impact the Federal Reserve’s decision to raise interest rates. Raising interest rates typically has a negative effect on bond and equity markets and slows inflation. Alternately, if wage inflation is decreasing, the Federal Reserve may lower rates, which helps stimulate the economy and labor market.
So-called wage push inflation is an overall rise in the cost of goods that results from a rise in wages. To maintain corporate profits after an increase in wages, employers must increase the prices they charge for the goods and services they provide. The overall increased cost of goods and services has a circular effect on the wage increase; eventually, as goods and services in the market overall increase, higher wages will be needed to compensate for the increased prices of consumer goods.
Example of a National Average Wage Index Calculation
The 2016 National Average Wage Index is calculated by multiplying the 2015 NAWI of $48,098.63 by the percentage change in average wages between 2015 and 2016 (based on the SSA’s average wage data). For example, the 2015 average wage was $46,119.78 and the 2016 average wage was $46,640.94, therefore, the 2016 NAWI is $48,642.15 = ($48,098.63 x $46,640.94 / $46,119.78). The SSA website lists the NAWI levels between 1951 and the current year.
The national average wage index for 2018, 3.62% higher than it was in 2017.
National Average Wage Index and Wage Indexing
Wage indexing is used by Social Security to adjust an individual’s earning history to inflation. An individual's wages are indexed to the NAWI the year they turn 60. The individual takes the NAWI for the year they turn 60 and divides it by the NAWI for the year they are indexing; they then multiply their included earnings by this number.
For example, suppose an individual's 1990 earnings were $30,000. In 2016, the individual turned 60, and the NAWI for that year was $48,642.15. The 2016 NAWI is divided by the 1990 NAWI ($48,642.15 / $21,027.98) to give an index factor of 2.31. The individual’s 1990 earnings are then multiplied by the profit factor, providing that year’s inflation-adjusted earnings of $69,300 = ($30,000 x 2.31).
As wage indexing uses the NAWI, an individual cannot work out the exact amount of Social Security they are going to receive until they turn 60. They could estimate the NAWI by taking average wage inflation into account.