What Is the National Average Wage Index (NAWI)?
Let me explain the National Average Wage Index, or NAWI, directly to you. It's a key measure of wage trends in the U.S., calculated each year by the Social Security Administration (SSA). The NAWI draws from income that's subject to federal taxes and contributions to deferred compensation plans.
You'll see the SSA using the NAWI mainly to index retirement and insurance benefits. It also updates various factors in the Old-Age, Survivors, and Disability Insurance (OASDI) program.
Key Takeaways on the NAWI
Understand that the NAWI tracks wage growth among American workers as an inflation indicator. The SSA computes it annually to adjust Social Security benefits and contributions tied to inflation.
For Social Security purposes, your wages get indexed to the NAWI of the year you turn 60, even though benefits eligibility starts at 62. Take the 2021 NAWI as an example—it's found by multiplying the 2020 average wage by the percentage change from 2020 to 2021.
Understanding the National Average Wage Index (NAWI)
The NAWI gives you insight into wage trends and can signal wage inflation to policymakers, potentially affecting the Federal Reserve's interest rate decisions. If rates rise, it often cools bond and equity markets while curbing inflation. Conversely, falling wage inflation might lead to rate cuts, boosting the economy and jobs.
This ties into wage-push inflation, where rising wages force employers to hike prices on goods and services to protect profits. That creates a cycle: higher costs mean workers need even bigger wages to keep up with consumer goods prices.
Example of a National Average Wage Index Calculation
Here's how the calculation works in practice. The 2021 NAWI comes from multiplying the 2020 NAWI by the average wage change from 2020 to 2021, using SSA data. You can find NAWI figures from 1951 onward on the SSA website.
For 2021, it reached $60,575.07, up 8.89% from 2020.
National Average Wage Index and Wage Indexing
Social Security uses wage indexing to adjust your earning history for inflation. You're eligible for benefits at 62, but earnings index to the average wage when you turned 60. From age 60, the factor is one. For earlier years, divide the age-60 NAWI by that year's NAWI to get the factor.
Say your 1990 earnings were $30,000, and you turned 62 in 2020, so we use the 2018 NAWI of $52,145.80. Divide that by 1990's $21,027.98 for a factor of 2.48. Multiply your earnings: $30,000 x 2.48 = $74,400 adjusted.
Since it relies on the NAWI, you can't pinpoint your exact Social Security amount until 62, but estimate it by factoring in average wage inflation.
The Bottom Line
The SSA calculates the NAWI yearly to track U.S. wage growth. It directly helps compute benefits, and policymakers rely on it for decisions like rate changes. Note: A correction from Feb. 5, 2023, fixed details on indexing age and factor calculation.
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