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The Misunderstood Social Security Earnings Test

Social Security’s retirement earnings test is misunderstood and complicated.  Those who claim retirement benefits before Full Retirement Age and continue working have 50 cents withheld for each dollar earned above $17,640.  But, any benefits withheld under the earnings test are effectively credited back with interest once they reach the Full Retirement Age, resulting in a permanent increase in their monthly benefits.  Many view the earnings test as a tax or penalty and thus work less.  Economists and policy makers who want to encourage work at older ages often suggest reforming or eliminating the earnings test.  However, studies show that changing the earnings test impacts not only work but also claiming patterns, as people tend to delay claiming to avoid running afoul of the earnings test.  To the extent that the elimination of the earnings test encourages people to sign up for benefits earlier, workers and their surviving spouse will end up with lower monthly amounts for life.

The effect of the earnings test on behavior is summarized in this 2013 paper.  It no longer applies to those over the Full Retirement Age.  In short, the benefits of eliminating it are reduced complexity and some increase in work incentives, but the risk is increased poverty among the very old as workers claim their benefits earlier, which likely explains why the test is still retained by lawmakers.  Read full MarketWatch piece here.

The AMAC Foundation offers a free-to-the-public advisory service to all folks ageing into–or already in–Social Security. This service provides guidance in understanding the complexities of Social Security and the myriad rules and regulations associated with the process for claiming benefits, with NSSA-Certified Social Security Advisors available via email or telephone to discuss options. Learn more about this service via the Foundation’s website.



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