National Average Wage Index (NAWI)
What Is the National Average Wage Index (NAWI)?
The National Average Wage Index (NAWI) is a measure of U.S. wage trends calculated every year 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 principally utilizes the National Average Wage Index to index retirement and insurance benefits in the United States. It is additionally used to refresh several factors in the operation of the Old-Age, Survivors, and Disability Insurance (OASDI) program.
Understanding the National Average Wage Index (NAWI)
The National Average Wage Index gives knowledge into the bearing of wage trends and may alert policymakers to wage inflation, which could impact the Federal Reserve's decision to raise interest rates. Raising interest rates normally adversely affects bond and equity markets and eases back inflation. On the other hand, assuming wage inflation is decreasing, the Federal Reserve might bring down rates, which helps [stimulate the economy](/monetary improvement) and labor market.
Supposed wage push inflation is an overall rise in the cost of goods that outcomes from a rise in wages. To keep up with corporate profits after an increase in wages, employers must increase the prices they charge for the goods and services they give. The overall increased cost of goods and services circularly affects the wage increase; at last, as goods and services in the market overall increase, higher wages will be expected to make up at the increased costs of consumer goods.
Illustration of a National Average Wage Index Calculation
The 2019 National Average Wage Index is calculated by duplicating the previous year's NAWI by the change in average wages for the previous two years (in view of the SSA's average wage data).
For instance, the 2019 NAWI would be calculated by duplicating the 2018 NAWI by the change in the average wage from 2017 to 2018. The SSA website records the NAWI levels among 1951 and the current year.
$54,099.99
The national average wage index for 2019, 3.75% higher than it was in 2018.
National Average Wage Index and Wage Indexing
Wage indexing is utilized by Social Security to change 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 partitions it by the NAWI for the year they are indexing; they then, at that point, increase their included earnings by this number.
For instance, assume an individual's 1990 earnings were $30,000. In 2019, the individual turned 60, and the NAWI for that year was $54,099.99. The 2019 NAWI is separated by the 1990 NAWI ($54,099.99/$21,027.98) to give an index factor of 2.57. The individual's 1990 earnings are then increased by the profit factor, giving that year's inflation-adjusted earnings of $77,100 = ($30,000 x 2.57).
As wage indexing utilizes the NAWI, an individual can't work out the specific amount of Social Security they will receive until they turn 60. They could estimate the NAWI by considering average wage inflation.
Features
- The National Average Wage Index (NAWI) tracks wage growth among American workers as a measure of inflation.
- For motivations behind Social Security benefits and taxation, an individual's wages are indexed to the NAWI the year they turn age 60.
- The NAWI is registered by the Social Security Administration every year to make changes in accordance with Social Security benefits and contributions, which are pegged to inflation.
