Trustees Reports- 1995

E. AUTOMATIC ADJUSTMENTS

The Social Security Act specifies that certain program amounts affecting the determination of OASDI benefits are to be adjusted annually, in general, to reflect changes in the economy. The law prescribes specific formulas that, when applied to reported statistics, produce `automatic' revisions in these program amounts and hence in the benefit-computation procedures.

In this section, values are shown for the program amounts that are subject to automatic adjustment, from the time that such adjustments became effective through 2004. Projected values for future years are based on the economic assumptions described in the preceding section of this report. Appendix F, in addition to providing the most recent determinations of program amounts under the automatic adjustment provisions, also provides a more complete description of such amounts.

Under the automatic-adjustment provisions affecting cost-of-living increases, benefits generally are increased once a year. These provisions were originally enacted in 1972 and first became effective with the benefit increase effective for June 1975. The 1983 amendments changed the effective month to December for years after 1982. For persons becoming eligible for benefits in 1979 and later, the increases generally begin with the year in which the worker reaches age 62, or becomes disabled or dies, if earlier. An automatic cost-of-living benefit increase of 2.8 percent, effective for December 1994, was announced in October 1994, as described in Appendix F. The automatic cost-of-living benefit increase for any year is normally based on the change in the CPI from the third quarter of the previous year to the third quarter of the current year.

Under section 215(b)(3) of the Social Security Act, the national average wage index for each year after 1950 is used to index the earnings of most workers first becoming eligible for benefits in 1979 or later. This procedure converts a worker's past earnings to approximately their equivalent values near the time of the worker's retirement or other eligibility, and these indexed values are used to calculate the worker's benefit. The average wage index is also used to adjust most of the program amounts that are subject to the automatic-adjustment provisions. Table II.E1 shows the average wage index as determined for each year 1951 through 1993.

The law provides for an automatic increase in the OASDI program's contribution and benefit base, based on the increase in the average wage index, for the year following a year in which an automatic benefit increase became effective. As described in Appendix F, the contribution and benefit base for 1995 was determined to be $61,200.

Under the retirement earnings test, earnings below certain amounts are exempted from the withholding of benefits payable to beneficiaries under age 70. Different exempt amounts apply for beneficiaries under age 65 and for those aged 65 to 69. The automatic adjustment provisions require that such exempt amounts be increased in the year following a year in which an automatic cost-of-living benefit increase becomes effective. Increases in the exempt amounts are based on increases in the average wage index.

The method used to increase the contribution and benefit base (and the `old-law' base as described later in this section) and the retirement test exempt amounts was modified by a provision of Public Law 103-296. Under this modified procedure, these amounts are indexed from a specified base year (1994) rather than the year-to-year index ing method used previously. This change makes the indexing procedures used for the contribution and benefit base and the retirement test exempt amounts consistent with the methods used for all other wage-indexed program amounts and eliminates possible cumulative rounding distortion. For further details concerning this modified procedure, refer to Appendix F.

Table II.E2 shows historical automatic cost-of-living benefit increases for the years 1975-94 and assumed increases through 2004. The table also shows historical year-to-year percentage increases in the average wage index for 1975-93 and assumed increases through 2004. As noted above, the OASDI contribution and benefit base and the retirement test exempt amounts are adjusted on the basis of such wage increases. The historical and projected amounts for this base and the exempt amounts are also shown in table II.E2. The projections are shown under the three alternative sets of economic assumptions described in the previous section.

Other wage-indexed amounts are shown in table II.E3. The table provides historical values from 1978, when the amount of earnings required for a quarter of coverage was first indexed, through 1995, and also shows projected amounts under the intermediate assumptions through the year 2004. These other wage-indexed program amounts are described in the following paragraphs.

As noted earlier, a worker who becomes eligible for benefits in 1979 or later generally receives a benefit based on his or her indexed earnings. These indexed earnings are used to calculate the worker's Average Indexed Monthly Earnings (AIME). The basic formula used to compute the Primary Insurance Amount (PIA) for workers who reach age 62, become disabled, or die in 1995 is:

• 90 percent of the first $426 of AIME, plus
• 32 percent of AIME in excess of $426 but not in excess of $2,567, plus
• 15 percent of AIME in excess of $2,567.

The amounts separating the individual's AIME into intervals--the bend points--are adjusted automatically by the changes in average wages as specified in section 215(a)(1)(B) of the Social Security Act.

A similar formula is used to compute the maximum total amount of monthly benefits payable on the basis of the earnings of a retired or deceased individual. This formula is a function of the individual's PIA, and is shown below for workers who first became eligible for benefits, or who died before becoming eligible, in 1995:

• 150 percent of the first $544 of PIA, plus
• 272 percent of the PIA in excess of $544 but not in excess of $785, plus
• 134 percent of the PIA in excess of $785 but not in excess of $1,024, plus
• 175 percent of the PIA in excess of $1,024.

These PIA-interval bend points are adjusted automatically in accordance with section 203(a)(2) of the Act.

An individual's insured status depends on the number of quarters of coverage he or she has earned while in covered employment. The 1977 amendments specified the amount of earnings required in 1978 to be credited with a quarter of coverage and provided for automatic adjustment of this amount for years thereafter.

The law provides for the determination of the OASDI contribution and benefit bases that would have been in effect in each year after 1978 under the automatic-adjustment provisions as in effect before the enactment of the 1977 amendments. This old-law base is used in determining special-minimum benefits for certain workers who have many years of low earnings in covered employment. Beginning in 1986, the old-law base is also used in the calculation of OASDI benefits for certain workers who are eligible to receive pensions based on noncovered employment. In addition, it is used for certain purposes under the Railroad Retirement program and the Employee Retirement Income Security Act of 1974.