What Does Price Indexing Mean for Social Security Benefits?
Currently, the Social Security uses the National Average Wage Index to determine how much money is paid to a Social Security beneficiary. Price indexing is a proposal by Social Security critics who want to fix Social Security’s long-term budgetary problems. Seniors need to understand how price indexing can dramatically alter how their monthly Social Security benefits are calculated.
How Are Monthly Social Security Benefits Determined?
Social security benefits use a calculation from the National Average Wage Index in order to how much will be given to a senior monthly. Every year, the National Wage Average Wage Index increases. When a person retires, their salaries from the past are recalculated in order to make them more in line with the current year’s average wages. This is supposed to ensure that a worker’s Social Security benefits adequately reflect how the standard of living has risen during his/her lifetime.
Price Indexing May Lower Monthly Social Security Benefits
Price indexing a Social Security worker’s wages means scrapping the use the National Average Wage Index and replacing it with the Consumer Price Index. The Consumer Price Index increases yearly but at a much lower rate than the National Average Wage Index. Under Price indexing, workers will notice that the monetary amount of their monthly Social Security benefits has fallen. The price indexing system is designed to save money for the Social Security fund and allow the government to cover budgetary shortfalls.
How Price Indexing Could Affect A Average Worker’s Different Social Security Benefits
Let’s use an example to illustrate how price indexing could lower a person’s pay. John is 25 years old and he earns an average salary of $32,140. When John decides to retire in 2045, he’ll notice that his Social Security benefits have fallen by 16% or $3,523 (in inflation adjusted 2005 dollars) because it was determined by price indexing as opposed to average wage indexing.
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