Your Benefit Calculation and the Importance of the Year You Reach Age 60 - AMAC Foundation Social Security Advisory Service

The formula for computing Social Security retirement benefits is based on your highest 35 years of reported earnings, with each year’s earnings up to age 60 indexed to bring them up to present-day values when your base benefit is calculated. So, if you’re still in the workforce and earning more than any of those 35 annual indexed earnings figures, you’ll be able to increase the input to your benefit calculation. This of course is of particular importance to anyone who may have years in their earnings record where income was low or non-existent, since earnings in years after age 60 will replace those zeros or low figures.

Of course, you may be wondering about the significance of age 60 in this process. Turning 60 means you’re two years away from becoming eligible to draw Social Security retirement benefits. Social Security, in calculating your benefits, uses your earnings record up to age 60 to index your earnings for eventual benefit calculation. This indexing process applies the National Average Wage Index—NAWI–for that year as the key factor to bring your prior year earnings up to present values. In fact, NAWI in the year you turn 60 serves as the basis for adjusting each year in your work history. The NAWI is, in simple terms, an inflation indicator used to track how wages change from year-to-year.

Here’s an example: for someone turning 60 in 2006, the NAWI for that year (4.6) is compared to each prior year’s NAWI to determine how that prior year’s earnings in the benefit calculation process must be adjusted to reflect present values. In this example, the NAWI for the preceding year was 3.66 so an earnings value in 2005 of $9,000 would be adjusted to $11,311, since the 2006 NAWI of 4.6 when divided by the NAWI for 2005 yields a factor of 1.2568. This factor, then, is the multiplier to bring the 2005 earnings up to a 2006 present value.

The process is repeated then for every year in your earnings record, each year using the NAWI from the year you turned 60 as the divisor. So, you can quickly see how important the NAWI in your 60th year is and how it impacts the yearly earnings values that go into calculating your benefit.

By the way, NAWI doesn’t always increase each year…there have been instances, like in 2009’s Great Recession, when the NAWI actually fell by 1.5%, thus slightly deflating the value of adjusted earnings going into the calculation process for your benefits.

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