Terms

Average Indexed Monthly Earnings

When the SSA computes worker's benefit, they first adjust or "index" his or her earnings to reflect the change in general wage levels that occurred during the worker's years of employment. 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. A certain number of years of earnings are needed to compute the average indexed monthly earnings. After determining the number of years, the SSA chooses those years with the highest indexed earnings, sums such indexed earnings, and divides the total amount by the total number of months in those years. They then round the resulting average amount down to the next lower dollar amount. The result is the average indexed monthly earnings.

For example:

A worker becomes eligible for retirement benefits when he or she attains age 62. If 2005 were the year of eligibility, we would divide the national average wage index for 2003 ($34,064.95) by the national average wage index for each year prior to 2003 in which the worker had earnings and multiply each such ratio by the worker's earnings. This would give the indexed earnings for each year prior to 2003. We would consider any earnings in or after 2003 at face value, without indexing. Then we would compute the average indexed monthly earnings; we'd use this average amount in computing the worker's primary insurance amount for 2005.