Social Security Report

Q & A

Ask Rusty – How Can We Change Social Security’s Earnings Limit?

Dear Rusty:  How do we change the Social Security earnings cap amount? Do I need to go through my Congressman? Social Security is withholding my benefit because they say I earned too much. The system is very unfair! Signed: Disgruntled Worker

Dear Disgruntled:  The Social Security earnings test has been a part of Social Security’s rules and regulations since the original Social Security Act of 1935. In fact, benefits were originally paid only if someone was not working at all, and if a beneficiary worked after they started collecting, they lost all benefits. The law has undergone changes over the years to bring it to where it is today, which is to limit the amount of earnings someone can have while collecting Social Security prior to their full retirement age before taking back some benefits.

If the earnings limit is exceeded, and you have not yet reached your full retirement age, Social Security typically withholds your benefits until they recover what you owe for exceeding the limit. The limit is adjusted annually based upon changes to the National Wage Index, and the annual limit for 2020 is $18,240, up from $17,640 last year. There is also a “first year rule” which will subject those who haven’t yet reached their full retirement age and claim benefits mid-year to a monthly limit (1/12^th of the annual limit) for the remainder of that year. The earnings limit increases significantly (by about 2.6 times) during the year you reach your full retirement age (FRA), and goes away entirely once your FRA is attained.

As you are probably aware, exceeding the limit will cause Social Security to take back $1 for every $2 you are over the limit, or if you’re subject to the “first year rule” they will take back your entire benefit for any month you exceed the monthly limit. In the year you reach your FRA (but before your FRA) the “penalty” for exceeding the limit is less severe – $1 for every $3 over the limit. What you may not be aware of is that when you reach your full retirement age, Social Security will give you time credit for any months you did not receive benefits because you exceeded the earnings limit, and receiving that time credit at your FRA will result in your benefit being increased. For example, if, over the years before you reached your FRA, Social Security withheld 12 months of benefits due to you exceeding the earnings limit, when you reach your full retirement age Social Security will recalculate your benefit to account for those 12 months by changing your claim date to 12 months later than when you actually applied. That will increase your benefit somewhat and, as a result, you may be able to eventually recoup some, or all, of the benefits which were withheld (depending upon your longevity).

How can we change the earnings cap? Well, the earnings limit already increases automatically each year with changes to the National Wage Index. But if you mean how can we eliminate it, I’m not optimistic that is possible since it would require full Congressional approval as well as Executive Branch approval to do so, and since Congress is now more focused on Social Security’s broader issue of the Trust Fund being depleted in about 2035 (which will result in an across-the-board cut in benefits unless Congress acts sooner). Nevertheless, you should certainly feel free to bring your concerns about Social Security’s “earnings cap” to the attention of your Congressional Representatives. Congressional Representatives are always willing to hear and understand the concerns of their constituents, and Social Security is very much a topic of discussion in Congress today.

This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s staff, trained and accredited by the National Social Security Association (NSSA). NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity. To submit a question, visit our website (amacfoundation.org/programs/social-security-advisory) or email us at ssadvisor@amacfoundation.org.