1. (a) General. In this method, your social security earnings after 1950 are indexed, as described in paragraph (d) of this section, then averaged over the period of time you can reasonably have been expected to have worked in employment or self-employment covered by social security. (Your earnings before 1951 are not used in finding your average indexed monthly earnings.)
2. (b) Which earnings may be used in computing your average indexed monthly earnings—(1) Earnings. In computing your average indexed monthly earnings, we use wages, compensation, self-employment income, and deemed military wage credits (see §§ 404.1340 through 404.1343) that are creditable to you for social security purposes for years after 1950.
3. (2) Computation base years. We use your earnings in your computation base years in finding your average indexed monthly earnings. All years after 1950 up to (but not including) the year you become entitled to old-age or disability insurance benefits, and through the year you die if you had not been entitled to old-age or disability benefits, are computation base years for you. The year you become entitled to benefits and following years may be used as computation base years in a recomputation if their use would result in a higher primary insurance amount. (See §§ 404.280 through 404.287.) However, years after the year you die may not be used as computation base years even if you have earnings credited to you in those years. Computation base years do not include years wholly within a period of disability unless your primary insurance amount would be higher by using the disability years. In such situations, we count all the years during the period of disability, even if you had no earnings in some of them.
4. (c) Average of the total wages. Before we compute your average indexed monthly earnings, we must first know the “average of the total wages” of all workers for each year from 1951 until the second year before you become eligible. The average of the total wages for years after 1950 are shown in appendix I. Corresponding figures for more recent years which have not yet been incorporated into this appendix are published in the Federal Register on or before November 1 of the succeeding year. “Average of the total wages” (or “average wage”) means:
5. (1) For the years 1951 through 1977, four times the amount of average taxable wages that were reported to the Social Security Administration for the first calendar quarter of each year for social security tax purposes. For years prior to 1973, these average wages were determined from a sampling of these reports.
6. (2) For the years 1978 through 1990, all remuneration reported as wages on Form W-2 to the Internal Revenue Service for all employees for income tax purposes, divided by the number of wage earners. We adjusted those averages to make them comparable to the averages for 1951-1977. For years after 1977, the term includes remuneration for services not covered by social security and remuneration for covered employment in excess of that which is subject to FICA contributions.
7. (3) For years after 1990, all remuneration reported as wages on Form W-2 to the Internal Revenue Service for all employees for income tax purposes, including remuneration described in paragraph (c)(2) of this section, plus contributions to certain deferred compensation plans described in section 209(k) of the Social Security Act (also reported on Form W-2), divided by the number of wage earners. If both distributions from and contributions to any such deferred compensation plan are reported on Form W-2, we will include only the contributions in the calculation of the average of the total wages. We will adjust those averages to make them comparable to the averages for 1951-1990.
8. (d) Indexing your earnings.

9. (1) The first step in indexing your social security earnings is to find the relationship (under paragraph (d)(2) of this section) between—

   1. (i) The average wage of all workers in your computation base years; and
   2. (ii) The average wage of all workers in your indexing year. As a general rule, your indexing year is the second year before the earliest of the year you reach age 62, or become disabled or die before age 62. However, your indexing year is determined under paragraph (d)(4) of this section if you die before age 62, your surviving spouse or surviving divorced spouse is first eligible for benefits after 1984, and the indexing year explained in paragraph (d)(4) results in a higher widow(er)'s benefit than results from determining the indexing year under the general rule.
10. (2) To find the relationship, we divide the average wages for your indexing year, in turn, by the average wages for each year beginning with 1951 and ending with your indexing year. We use the quotients found in these divisions to index your earnings as described in paragraph (d)(3) of this section.

11. (3) The second step in indexing your social security earnings is to multiply the actual year-by-year dollar amounts of your earnings (up to the maximum amounts creditable, as explained in §§ 404.1047 and 404.1096 of this part) by the quotients found in paragraph (d)(2) of this section for each of those years. We round the results to the nearer penny. (The quotient for your indexing year is 1.0; this means that your earnings in that year are used in their actual dollar amount; any earnings after your indexing year that may be used in computing your average indexed monthly earnings are also used in their actual dollar amount.)

    Example:Ms. A reaches age 62 in July 1979. Her year-by-year social security earnings since 1950 are as follows: Year Earnings 1951 $3,200 1952 3,400 1953 3,300 1954 3,600 1955 3,700 1956 3,700 1957 4,000 1958 4,200 1959 4,400 1960 4,500 1961 2,800 1962 2,200 1963 0 1964 0 1965 3,700 1966 4,500 1967 5,400 1968 6,200 1969 6,900 1970 7,300 1971 7,500 1972 7,800 1973 8,200 1974 9,000 1975 9,900 1976 11,100 1977 9,900 1978 11,000 Step 1. The first step in indexing Ms. A's earnings is to find the relationship between the general wage level in Ms. A's indexing year (1977) and the general wage level in each of the years 1951-1976. We refer to appendix I for average wage figures, and perform the following computations: Year I. 1977 general wage level II. Nationwide average of the total wages III. Column I divided by column II equals relationship 1951 $9,779.44 $2,799.16 3.4937053 1952 9,779.44 2,973.32 3.2890641 1953 9,779.44 3,139.44 3.1150269 1954 9,779.44 3,155.64 3.0990354 1955 9,779.44 3,301.44 2.9621741 1956 9,779.44 3,532.36 2.7685287 1957 9,779.44 3,641.72 2.6853904 1958 9,779.44 3,673.80 2.6619413 1959 9,779.44 3,855.80 2.5362934 1960 9,779.44 4,007.12 2.4405159 1961 9,779.44 4,086.76 2.3929568 1962 9,779.44 4,291.40 2.2788461 1963 9,779.44 4,396.64 2.2242986 1964 9,779.44 4,576.32 2.1369659 1965 9,779.44 4,658.72 2.0991689 1966 9,779.44 4,938.36 1.9803012 1967 9,779.44 5,213.44 1.8758133 1968 9,779.44 5,571.76 1.7551797 1969 9,779.44 5,893.76 1.6592871 1970 9,779.44 6,186.24 1.5808375 1971 9,779.44 6,497.08 1.5052054 1972 9,779.44 7,133.80 1.3708599 1973 9,779.44 7,580.16 1.2901364 1974 9,779.44 8,030.76 1.2177478 1975 9,779.44 8,630.92 1.1330704 1976 9,779.44 9,226.48 1.0599318 1977 9,779.44 9,779.44 1.0000000 Step 2. After we have found these indexing quotients, we multiply Ms. A's actual year-by-year earnings by them to find her indexed earnings, as shown below: Year I. Actual earnings II. Indexing quotient III. Column I multiplied by column II equals indexed earnings 1951 $3,200 3.4937053 $11,179.86 1952 3,400 3.2890641 11,182.82 1953 3,300 3.1150269 10,279.59 1954 3,600 3.0990354 11,156.53 1955 3,700 2.9621741 10,960.04 1956 3,700 2.7685287 10,243.56 1957 4,000 2.6853904 10,741.56 1958 4,200 2.6619413 11,180.15 1959 4,400 2.5362934 11,159.69 1960 4,500 2.4405159 10,982.32 1961 2,800 2.3929568 6,700.28 1962 2,200 2.2788461 5,013.46 1963 0 2.2242986 0 1964 0 2.1369659 0 1965 3,700 2.0991689 7,766.92 1966 4,500 1.9803012 8,911.36 1967 5,400 1.8758133 10,129.39 1968 6,200 1.7551797 10,882.11 1969 6,900 1.6592871 11,449.08 1970 7,300 1.5808375 11,540.11 1971 7,500 1.5052054 11,289.04 1972 7,800 1.3708599 10,692.71 1973 8,200 1.2901364 10,579.12 1974 9,000 1.2177478 10,959.73 1975 9,900 1.1330704 11,217.40 1976 11,100 1.0599318 11,765.24 1977 9,900 1.0000000 9,900.00 1978 11,000 0 11,000.00

12. (4) We calculate your indexing year under this paragraph if you, the insured worker, die before reaching age 62, your surviving spouse or surviving divorced spouse is first eligible after 1984, and the indexing year calculated under this paragraph results in a higher widow(er)'s benefit than results from the indexing year calculated under the general rule explained in paragraph (d)(1)(ii). For purposes of this paragraph, the indexing year is never earlier than the second year before the year of your death. Except for this limitation, the indexing year is the earlier of—

    1. (i) The year in which you, the insured worker, attained age 60, or would have attained age 60 if you had lived, and
    2. (ii) The second year before the year in which the surviving spouse or the surviving divorced spouse becomes eligible for widow(er)'s benefits, i.e., has attained age 60, or is age 50-59 and disabled.

    3. (e) Number of years to be considered in finding your average indexed monthly earnings. To find the number of years to be used in computing your average indexed monthly earnings—

       1. (1) We count the years beginning with 1951, or (if later) the year you reach age 22, and ending with the earliest of the year before you reach age 62, become disabled, or die. Years wholly or partially within a period of disability (as defined in § 404.1501(b) of subpart P of this part) are not counted unless your primary insurance amount would be higher. In that case, we count all the years during the period of disability, even though you had no earnings in some of those years. These are your elapsed years. From your elapsed years, we then subtract up to 5 years, the exact number depending on the kind of benefits to which you are entitled. You cannot, under this procedure, have fewer than 2 benefit computation years.
       2. (2) For computing old-age insurance benefits and survivors insurance benefits, we subtract 5 from the number of your elapsed years. See paragraphs (e) (3) and (4) of this section for the dropout as applied to disability benefits. This is the number of your benefit computation years; we use the same number of your computation base years (see paragraph (b)(2) of this section) in computing your average indexed monthly earnings. For benefit computation years, we use the years with the highest amounts of earnings after indexing. They may include earnings from years that were not indexed, and must include years of no earnings if you do not have sufficient years with earnings. You cannot have fewer than 2 benefit computation years.
       3. (3) Where the worker is first entitled to disability insurance benefits (DIB) after June 1980, there is an exception to the usual 5 year dropout provision explained in paragraph (e)(2) of this section. (For entitlement before July 1980, we use the usual dropout.) We call this exception the disability dropout. We divide the elapsed years by 5 and disregard any fraction. The result, which may not exceed 5, is the number of dropout years. We subtract that number from the number of elapsed years to get the number of benefit computation years, which may not be fewer than 2. After the worker dies, the disability dropout no longer applies and we use the basic 5 dropout years to compute benefits for survivors. We continue to apply the disability dropout when a person becomes entitled to old-age insurance benefits (OAIB), unless his or her entitlement to DIB ended at least 12 months before he or she became eligible for OAIB. For first DIB entitlement before July 1980, we use the rule in paragraph (e)(2) of this section.

       4. (4) For benefits payable after June 1981, the disability dropout might be increased by the child care dropout. If the number of disability dropout years is fewer than 3, we will drop out a benefit computation year for each benefit computation year that the worker meets the child care requirement and had no earnings, until the total of all dropout years is 3. The child care requirement for any year is that the worker must have been living with his or her child (or his or her spouse's child) substantially throughout any part of any calendar year that the child was alive and under age 3. In actual practice, no more than 2 child care years may be dropped, because of the combined effect of the number of elapsed years, 1-for-5 dropout years (if any), and the computation years required for the computation.

          Example:Ms. M., born August 4, 1953, became entitled to disability insurance benefits (DIB) beginning in July 1980 based on a disability which began January 15, 1980. In computing the DIB, we determined that the elapsed years are 1975 through 1979, the number of dropout years is 1 (5 elapsed years divided by 5), and the number of computation years is 4. Since Ms. M. had no earnings in 1975 and 1976, we drop out 1975 and use her earnings for the years 1977 through 1979. Ms. M. lived with her child, who was born in 1972, in all months of 1973 and 1974 and did not have any earnings in those years. We, therefore, recompute Ms. M.'s DIB beginning with July 1981 to give her the advantage of the child care dropout. To do this, we reduce the 4 computation years by 1 child care year to get 3 computation years. Because the child care dropout cannot be applied to computation years in which the worker had earnings, we can drop only one of Ms. M.'s computation years, i.e., 1976, in addition to the year 1975 which we dropped in the initial computation.

          1. (i) Living with means that you and the child ordinarily live in the same home and you exercise, or have the right to exercise, parental control. See § 404.366(c) for a further explanation.
          2. (ii) Substantially throughout any part of any calendar year means that any period you were not living with the child during a calendar year did not exceed 3 months. If the child was either born or attained age 3 during the calendar year, the period of absence in the year cannot have exceeded the smaller period of 3 months, or one-half the time after the child's birth or before the child attained age 3.
          3. (iii) Earnings means wages for services rendered and net earnings from self-employment minus any net loss for a taxable year. See § 404.429 for a further explanation.

    4. (f) Your average indexed monthly earnings. After we have indexed your earnings and found your benefit computation years, we compute your average indexed monthly earnings by—

       1. (1) Totalling your indexed earnings in your benefit computation years;
       2. (2) Dividing the total by the number of months in your benefit computation years; and

       3. (3) Rounding the quotient to the next lower whole dollar. if not already a multiple of $1.

          Example:From the example in paragraph (d) of this section, we see that Ms. A reaches age 62 in 1979. Her elapsed years are 1951-1978 (28 years). We subtract 5 from her 28 elapsed years to find that we must use 23 benefit computation years. This means that we will use her 23 highest computation base years to find her average indexed monthly earnings. We exclude the 5 years 1961-1965 and total her indexed earnings for the remaining years, i.e., the benefit computation years (including her unindexed earnings in 1977 and 1978) and get $249,381.41. We then divide that amount by the 276 months in her 23 benefit computation years and find her average indexed monthly earnings to be $903.56, which is rounded down to $903.

[47 FR 30734, July 15, 1982; 47 FR 35479, Aug. 13, 1982, as amended at 48 FR 11695, Mar. 21, 1983; 51 FR 4482, Feb. 5, 1986; 57 FR 1381, Jan. 14, 1992]