The Social Security Earnings Test—Why Does it Exist? - AMAC Foundation

Claiming Social Security retirement benefits early—that is, before full retirement age (FRA)—is still a popular option in retirement finance planning. For some, it offers the opportunity to step out of a difficult work environment and into different, less stressful work. For others, especially those affected by job loss, it offers a financial lifeline.

Whatever the reason, the option is taken with the understanding that the monthly benefit will be less than the amount available at FRA—as much as 30% less under current rules. To compensate, early retirees often plan to continue working, either lesser hours or in a lower-paying position, only to be surprised by a rule called the “Retirement Earnings Test (RET).” And it’s often not a pleasant surprise!

Why is there a “Retirement Earnings Test?”

That’s usually the question early filers raise. The answer lies in Social Security’s archives, specifically in the text of the Social Security Act signed by President Roosevelt way back in 1935. That Act decreed that “No person shall receive such old-age annuity unless … He is not employed by another in a gainful occupation.”

That was kind of blunt, and the RET has been debated and modified frequently through the years, but the original rationale that since Social Security is intended as a social insurance safety net for old age, unemployment, illness, and dependency remains the basic reason for the rule. The focus is protection from lost earnings, rather than as a means to supplement pensions.

How does the RET work?

The RET stipulates that Social Security will reduce the benefit claimed early if earnings from employment exceeds a certain level. The test applies to everyone collecting Social Security retirement, spousal, or survivor benefits before reaching their full retirement age (FRA). Each year, Social Security sets a limit for how much recipients of early benefits may earn before those benefits are reduced. The limit increases each year based on changes to the National Average Wage Index, and for 2024 the base annual earnings limit is $22,320 or $1,860 per month.  If the base annual limit is exceeded, Social Security will assess a penalty of $1 for every $2 earned over the limit, and that penalty will affect benefits.  

Exceeding the annual limit will result in Social Security issuing an Overpayment Notice and offering two primary options to repay – either pay what is owed in one lump sum, or they will withhold your benefits until the overpayment is fully recovered. Benefits lost in this manner, however, are not a true “penalty” because they are not fully lost forever.

At FRA, Social Security will determine how many months benefits were forfeitedbecause of the earnings limit., and adjust the claimant’s starting date to a date equal to the number of months later than the date your benefits originally started. This increases the monthly FRA benefit amount accordingly so that, over time, some or all the benefits withheld can be recovered. 

The annual earnings limit increases by about 2 ½ times during the year FRA is reached and disappears completely once FRA is attained. Exceeding the earnings limit during the FRA year (in the months before FRA) will result in $1 of withheld benefits for every $3 over the limit.

There is also a special “first-year rule” for those who start benefits mid-year prior to attaining their FRA. This first-year rule says that earnings in the months before your benefits start do not count toward the earnings limit. But once your benefits start there is a monthly limit which applies for each month remaining in that first calendar year. For those who start early benefits mid-year, Social Security will use either the monthly limit or the annual limit, whichever method results in the smallest penalty.

If earnings greatly exceed the annual limit, a claimant could be disqualified from receiving early Social Security benefits because their early benefit amount may be insufficient to offset the penalty for exceeding the earnings limit.

What’s the Future Look Like for the RET?

As we’ve mentioned often on this site, Social Security is facing insolvency about a decade from now. Accordingly, it’s reasonable to expect that the program will undergo some level of redesign to recover its sustainability and hopefully to align it better with 21st-century economics. One of the areas that could be examined in this process is the RET and its applicability today, since the world of work has changed dramatically since the 1930s.

In fact, AMAC’s Social Security Guarantee legislative framework proposal includes a recommendation to eliminate the RET completely, citing the overly complex process and the extraordinary amount of clerical effort to track the process. 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, in fact, 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.

Whether the RET remains in effect or succumbs to modernization is something to be resolved in Congress, so time will tell. In the meantime, anyone having questions regarding the RET is invited to contact the AMAC Foundation Social Security Advisory Service for assistance. Learn more about this free-to-the-public service here.   

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