As required by law, the Social Security Administration calculates retirement benefits on the basis of a worker's wage history, using the worker's average indexed monthly earnings, or AIME. The current formula computes the AIME on the basis of a worker's earnings in his or her 35 years of highest earnings that are subject to Social Security taxes. If a worker has worked for fewer than 35 years, the average includes years with zero earnings.
This option would gradually lengthen the AIME computation period to 38 years for people who turn 62 in 2014 and beyond. The extended averaging period would generally reduce benefits by requiring that additional years of lower earnings be factored into the benefit computation. The option would not change the number of years used to compute AIMEs for disabled workers; only retirement benefits would be affected.
The option would have the largest effect on people who worked for fewer than 38 years, because they would have additional years with no earnings included in the calculation of their benefits. However, the option would reduce benefits even for workers who worked 38 years or more, because those people would almost always have had lower average earnings in the additional computation years than they would have had in the 35 years of their highest earnings.
Lengthening the period by three years would reduce federal outlays by almost $7 billion through 2016 and by roughly $51 billion through 2021. By 2050, Social Security outlays would be reduced by 2 percent--from 5.9 percent to 5.8 percent of gross domestic product.
An argument in support of expanding the computation period considers increased life expectancy: Because people now live longer, lengthening the period would encourage them to remain in the labor force longer and extend the amount of time they pay into the Social Security system, boosting federal revenues from income and payroll taxes. Additional work would also result in higher future Social Security benefits. The 10-year estimates for this option do not include those two effects.
Extending the computation period also would reduce the advantage currently enjoyed by workers who postpone entering the labor force--for instance, while they pursue advanced education. People with more education generally earn more than their counterparts who enter the labor force sooner; because many years of low or no earnings can now be ignored in calculating the AIME, the former group experiences little or no loss of benefits for any additional years spent not working and thus not paying Social Security taxes.
An argument against this option is that some beneficiaries retire early because of circumstances they do not control, such as poor health or job loss, and this option could adversely affect those recipients who were not able to continue working for 38 years. Other disproportionately affected workers would be parents who interrupted a career to raise children or workers who experienced long stretches of unemployment. On average, the benefit reduction would be larger for women than for men, because women tend to spend more years out of the workforce.