Examining the Retirement Earnings Test
Social Security regulations stipulate that upon beginning retirement, spousal, or survivor benefits, beneficiaries are considered “retired” and expected to leave the workforce. Current regulations allow for continued earning from employment for those who claim benefits before their full retirement age (FRA), but there is a limit to how much a worker can earn and continue to receive scheduled benefits each year.
Social Security sets annual limits on the earnings early filers can record before those benefits are reduced. The limit changes yearly based on the National Average Wage Index, with the 2025 limit set at $23,400. Exceeding that limit triggers a reduction of $1 for every $2 earned over the limit, causing an impact on benefit payments. For the year the early retiree reaches FRA, there is a different limit and a different reduction factor applicable to the months until the month full retirement age is reached.
The Social Security Retirement Earnings Test (RET) severely limits the ability of early retirees to earn income without reducing their benefits. Because of this provision, many older Americans are forced out of the workplace when they would otherwise continue contributing to payroll tax revenue. Removing this provision would allow early retirees to increase their earnings while receiving Social Security benefits.
In the original bill establishing Social Security, it was stipulated that “No person shall receive such old-age annuity unless . . . He is not employed by another in a gainful occupation.”[1] This absolute stipulation was quickly (and repeatedly) modified more than a dozen times through the years to allow for a base amount of earnings that would not affect benefits, and in 1975 the limits were tied to the national average wage index for annual adjustment purposes. [2]
The last modification to the earnings test regulation occurred near the end of the Clinton Administration when Congress decreed that the earnings limit would evaporate completely at full retirement age (FRA). President Clinton stated in his January 1999 State of the Union Address, “We should eliminate the limits on what seniors on Social Security can earn.” Unfortunately, the details of the amendment qualified “seniors” to mean only those at their FRA, leaving the limitation in effect for those who filed before FRA.[3]
In situations where benefits are reduced because of earnings exceeding the limit, there is a provision in Social Security to return the withheld payments to the beneficiary through a recalculation of the recipient’s base benefit amount (PIA). Although some recovery can be realized, it would be recovered over the remaining years of benefits, making it unlikely that the withheld earnings would be fully recovered.[4]
Administration of the earnings test is an overly complex process, creating an extraordinary amount of clerical effort to track. The reporting and verification processes place a substantial recordkeeping burden on the workers and the Social Security Administration staff and adds to the overpayment situations so often highlighted in the media. Likewise, for those who elect to file early, it is often a surprise that affects cash flow planning in retirement, especially among those intending to use the extra income to bolster their savings for later years.
If you are considering claiming Social Security retirement benefits before your full retirement age and have questions about how the RET could affect your monthly benefits, know that the AMAC Foundation offers a free-to-the-public Social Security Advisory Service to help you. Learn more about this service and how to access it here.
[1] Social Security Administration, https://www.ssa.gov/history/ret.html
[2] Ibid.
[3] Ibid.
[4] Social Security Administration, Exempt Amounts Under The Earnings Test, https://www.ssa.gov/OACT/COLA/rtea.html