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Dissecting the Social Security Earnings Test
The Social Security Earnings Test severely limits the ability of early retirees to earn income without having their benefits reduced. Because of this provision, many older Americans are forced out of the workplace when they would otherwise continue contributing to payroll tax revenue. Many folks aging into Social Security eligibility are surprised (and annoyed) by the earnings test, and many question the logic behind this part of the rulebook. In response to a question on its origin and purpose, Ner Wallet columnist Liz Weston, in a post oregonlive.com provides a recap of the Earnings Test’s history and describes how it works. Check out her post here.
Administration of the earnings test is an overly complex process, creating an extraordinary amount of clerical effort to track. 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. From Social Security’s revenue perspective, limiting the earnings of retirees reduces payroll taxes, thus exacerbating the program’s financial problems. Eliminating this provision would encourage workforce participation and allow retirees to earn more and pay more into the program via FICA taxes. In its plan for reforming Social Security in the face of the looming insolvency problem, the Association of Mature American Citizens (AMAC) has developed a legislative framework that includes a recommendation to eliminate the test in its entirety. Check our AMAC’s Social Security Guarantee here.