Greenspan Commission

Appendix I

GLOSSARY

Average Indexed Monthly Earnings (AIME) -- The earnings used to determine the Primary Insurance Amount, on which benefits for a worker and family will be based. Earnings for each year after 1950 are updated (indexed) to the indexing year (the second year before the year in which the worker becomes age 62 or, if earlier, becomes disabled or dies) to take account of the increase in average wages since the year that they were earned. Earnings for the indexing year and subsequent years are used at their actual values. Then, the highest years of indexed earnings for a specified number of years are selected and averaged to yield the AIME.

Primary Insurance Amount (PIA) -- The amount on which all monthly OASDI benefits are based. A worker's PIA is derived from Average Indexed Monthly Earnings by applying it in a weighted benefit formula. Such formula for persons reaching age 62 in 1983 (or dying or becoming disabled before age 62 in 1983) is 90% of the first $254 of AIME, plus 32% of the next $1,274 of AIME, plus 15% of AIME in excess of $1,528. For persons attaining age 62 in subsequent years, the dollar figures are changed to reflect relative changes in nationwide average wages. A worker's disability benefit or old-age benefit at age 65 is equal to 100% of PIA. Other benefits are various percentages of the worker's PIA.

Maximum Family Benefit -- The maximum monthly amount that can be paid on a worker's earnings record. Whenever the amount of benefits payable on an earnings record exceeds the maximum, each auxiliary or survivor benefit is proportionately reduced to bring the total within the maximum. (Benefits for divorced spouses and surviving divorced spouses are excluded from this limit.)

Replacement Rate -- The worker's benefit (or the family benefit) as a percentage of prior earnings. If a worker earned $500 a month before retirement and receives a benefit of $350, the replacement rate is 70%.

Generally, the replacement rate is the relationship between the annual benefit rate payable for the first month of entitlement and the gross taxable earnings for the year before entitlement. However, in some contexts, it may be the relationship between the benefit and net after-tax earnings for the prior year. (In other contexts, the benefits payable for the first full year of entitlement, including any CPI increase for June and thereafter, are used as the numerator.)

Bend Points -- The points in the PIA benefit formula at which the percentage factor that is applicable to the AIME changes. For example, in the formula for those reaching age 62 in 1983, these points are $254 and $1,528. The percentages applicable are 90%, 32%, and 15%. When developing the formula for persons attaining age 62 in subsequent years, the percentages remain constant, but the dollar figures are changed to reflect relative changes in nationwide average wages.

Trust-Fund Ratio -- The trust-fund balance expressed as a percentage of total outgo during the next 12 months.

Cost Rate -- The outgo for benefits and administrative expenses for a year expressed as a percentage of the payroll that is taxable for Social Security purposes for that year.