Q & A
Why is there an earnings limit for Social Security Retirement?
Answer: Ever wonder why annual earnings from gross wages or net self-employment can reduce the amount of Social Security retirement received (now only if you are younger than full retirement age)?
According to the history section of the Social Security website, the retirement earnings test, also called the annual earnings test, was included as part of the 1935 original bill submitted by President Roosevelt to Congress. That bill language stated, “No person shall receive such old-age annuity unless . . . He is not employed by another in a gainful occupation.” This was the retirement earnings test provision and very important because actuarial calculations underlying the Administration’s proposal were based on the assumption that a retirement test would be included in the law. Read more…
Source: Social Security Administration information Blog
I believe that my retirement income from social security is an annuity payment that I contributed towards for the last 45 plus years. I did not go out on disability from my job, as some do to get a full benefits payment years ahead of time. I have never heard about a limit of earnings until my retirement year, and if I had heard, I would have just finished the year. When I submitted my application for social security, it was 4 months before I would receive my first check (I thought) and estimated my annual earnings based on my time left on the job. The thing that bothers me most is the two way conversation ability to be briefed on my retirement date and earnings, and tell me about the effects. But most of all, if I put money in as an annuity, why should I have to wait any time to start receiving a check. It was my money, that’s paid others retirements and it’s time for me to enjoy the returns for years of submission
Ken,
I’m afraid you have a misconception about how Social Security works. The contributions you have made over your lifetime from your work earnings were not deposited into a personal account for you. Rather, contributions (payroll taxes) paid by all who work are use to help pay benefits for all who receive. This is how the SS system was originally conceived and how it has worked since enacted in 1935. In return for those contributions made to pay benefits to others, you have become entitled to receive Social Security payments for the rest of your life. And now, those who are still working will help pay for the benefits you are receiving since you retired from working. So, you haven’t been contributing to an annuity to pay your future benefits, but you’ve been earning credits which entitle you to collect Social Security until you die. Further, if you have dependents who are eligible, they can also get SS benefits on your lifetime earnings record.
Social Security’s “earnings test” applies to everyone who collects Social Security benefits prior to their full retirement age and who still works. SS sets a limit to how much can be earned by those collecting early benefits, and the earnings limit changes annually with changes to the National Wage Index (the earnings limit for 2022 is $19,560). If you exceed the earnings limit when collecting early SS benefits, Social Security will take away some of your benefits. The “penalty” for exceeding the limit is $1 for every $2 you are over the limit (half of what you exceed the limit by) and Social Security will require you to repay any benefits you weren’t entitled to because you exceeded the limit. Social Security is, after all, a program for those who are retired. In the year you reach your full retirement age the earnings limit increases by about 2.5 times and the penalty is less (1/3rd of what you exceed the limit by), and as soon as you reach your full retirement age the earnings test no longer applies. However, if you have any SS benefits withheld due to exceeding the earnings limit, when you reach your full retirement age you’ll get credit for those months and your benefit amount will be permanently increased.
FYI, it typically takes several months from the time you apply until your benefit payments begin, so your experience (4 months) isn’t especially unique. It is, however, unfortunate that you weren’t made aware of this (and the earnings test) when discussing your application with the Social Security Administration. SSA, however, places the onus on the applicant to decide the proper time to claim their Social Security benefits, which is why the AMAC Foundation created our free Social Security Advisory Service. Far too often, seniors claim Social Security without fully understanding the consequences of their decision on when to claim, and the SSA isn’t always a dependable source of information, but the AMAC Foundation’s Social Security Advisory Service is just a phone call, or an email away. The AMAC Foundation will provide expert advice for your social Security options, either as an individual or a married couple, or whatever your personal circumstance are.
So, Ken, you’re now getting your Social Security payments from funding provided by others who are still working. The size of your SS payment relates to your lifetime earnings history and the age at which you claimed your benefits. If it’s any consolation, though you weren’t contributing to a personal annuity, under the current system those who claim Social Security at or near their full retirement age get back every dollar they’ve contributed to the program within about 5 years. Most people get back much more in lifetime Social Security benefits than they would get from making similar contributions to an annuity.
Russell Gloor
National Social Security Advisor
The AMAC Foundation