Q & A
Ask Rusty – Earnings Test
Dear Rusty: I’m 62 and still working but would like to get Social Security because we could sure use the extra money. I’ve heard that if I keep working that my Social Security benefit will be less, so now I don’t know if I should go ahead with my Social Security or just wait. I sure don’t want to lose money on my Social Security for the rest of my life. Signed: Perplexed
Dear Perplexed: Social Security rules for when you continue to work after your benefits start can be confusing. Social Security calls this the “Annual Earnings Test”. The basic rule is that you can continue to work after you start collecting Social Security but, depending on how much you earn, they will reduce your benefit payments if you haven’t yet reached your “full retirement age”. But here’s a key point: You don’t actually lose the amount they will take away, because when you reach your full retirement age (in your case, 66) your Social Security benefit will be increased to account for what they withheld. Here’s how it works:
If you’re working and collecting Social Security while you’re age 62 through 65, your benefit will be reduced by $1 for every $2 you earn over $16,920. In other words, they’ll take back half of anything you earn over $16,920. In the year that you become age 66, you can earn up to $44,880, after which they will reduce your benefit by $1 for every $3 you earn over $44,880 (one third). Note these earnings limits are for 2017; they change annually. Once you reach your full retirement age of 66, you can earn as much as you want and there will be no benefit reduction.
The way that Social Security gets back what you owe them is by withholding your benefit payments the following year, for as many months as needed for them to recover what you owe from over-earning the previous year. That means that you won’t receive any Social Security payments for one or more months the following year until they recover what’s due. Losing those payments can hurt, but don’t fret too much because when you finally reach your full retirement age your benefit amount will be recalculated eliminating those months when your benefit was withheld because you exceeded the earnings limit. You don’t actually get back the dollars that were withheld due to your over-earning, but rather a formula is used to recalculate your benefit when you reach your full retirement age. And here’s how that works:
If you start collecting benefits at age 62, your benefit will be reduced by about 25% or more of what it would be if you waited until your full retirement age of 66. But because you didn’t actually collect benefits in those months you were paying back what you owed due to over-earning, they will give you time credit for those months as though you didn’t begin collecting at age 62, but rather an age later than that – 62 plus the number of months they withheld your benefits due to over-earning. For example, if your over-earning caused them to withhold your benefits for 3 months of each of the 4 years until you reached your full retirement age, when you reached 66 years of age they would recalculate your benefit to be what you would get if you began collecting 12 months later than you actually did (3 months per year without benefits for 4 years equals 12 months). So, starting at your full retirement age of 66, your benefit amount would be adjusted to what it would have been if you had started collecting at age 63, which means that you would be collecting 82.22% of your full benefit instead of 75% – an increase of about 7.22%.
So, if you need the money and want to start collecting at 62 but also want to continue working, you can do that. Just be aware that when you exceed those earnings limits, they will withhold your benefits the following year(s) until they get back what’s due them. But, when you reach your full retirement age, your benefit amount will be increased so that that you will eventually get back the money they withheld. And, that benefit increase at full retirement age will last for the rest of your life.