How to Insure Your Income: Benefit Indexing
Since 1979, Congress has required the use of benefit indexing to stabilize the trust funds from which Social Security benefits are paid. Indexing provides for cost of living increases, which are applied to Social Security benefits after a person achieves eligibility for these benefits, not before eligibility. Thus, the benefit keeps pace with inflation.
This method establishes an earnings history for the worker. Earnings are indexed up to the indexing year. By definition, the indexing year is the second year prior to the worker's attainment of age 62, death or disability -- whichever occurs first. Thus, the indexing year is two years prior to a worker's first eligibility for benefits.
Paul becomes eligible for disability benefits in January 1995. His indexing year is two years prior -- namely, 1993. Therefore, his wages will be indexed through the 1992 work year.
Wages are indexed by applying a ratio to the disabled person's actual earnings for each year up to -- but not including -- the indexing year. The person is then credited with an indexed wage greater than his actual earnings, if appropriate. Once the indexing year is reached, actual earnings are used.
