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Examining the “Working After Claiming Benefits” Trend - ThinkAdvisor.com; AMAC Foundation
One of the prevalent trends in the U.S. workforce participation rate these days is the increasing number of folks remaining employed through age 70. Think Advisor senior reporter John Manganaro takes a deep dive into this trend in a post on their website yesterday, examining the reasons why this is happening and its implications for the U.S. retirement environment. In his article, Manganaro explains the “penalty” associated with remaining employed after claiming benefits, something that often comes as a surprise to many who claim before their full retirement age.
Exploring the “Retirement Earnings Test”
The “Retirement Earnings Test” administered by Social Security to limit benefits in early claiming situations is an archaic portion of the program’s rulebook. 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 (NRA), but there is a limit to how much a worker can earn and continue to receive scheduled benefits prior to reaching NRA.
Social Security sets annual limits on the earnings early filers can record before those benefits are reduced. The limit changes each year based on the National Average Wage Index (NAWI), 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. In 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 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. Removing this provision would allow early retirees to increase their earnings while receiving Social Security benefits.
How the “Retirement Earnings Test” Came to Be
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 normal retirement age (NRA).In his January 1999 State of the Union Address, President Clinton stated, “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 NRA, leaving the limitation in effect for those who filed for benefits before NRA.[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, the adjustment would extend over the remaining years of benefit payments[4], making it unlikely that the withheld earnings would be fully recovered.
The Earnings Test is a Burden for SSA
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 often add 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.
From a Social Security 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.
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[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