When you receive Social Security retirement benefits while working, you could run into one of the more complicated and confusing rules, the Social Security earned income limit, or earnings test.
The rule exists because Congress historically discouraged people from working while receiving Social Security benefits.
You can receive Social Security retirement benefits anytime beginning at age 62 without regard to whether you are retired. But at certain ages, if you’re receiving retirement benefits and your earnings exceed a limit, your retirement benefits will be reduced.
Most people believe you lose Social Security benefits in those cases, but that’s not really what happens. The benefits are deferred. You get them back later.
Because of changes made in the 1990s, the earnings limit applies only until the year you reach full retirement age (FRA).
If you’re already older than your full retirement age, or you don’t plan to claim Social Security benefits before your FRA, then you don’t have to worry about the earned income limit.
When you’re younger than FRA during the entire calendar year and receive Social Security benefits, Social Security will deduct $1 from your benefits for each $2 you earn above the earnings limit. The limit, which is indexed for inflation each year, is $22,320 in 2024.
Suppose someone is 64 years old in 2024 and receiving Social Security retirement benefits. He also is working and will earn $23,320 for the year. His earnings will be $1,000 above the earnings limit. He’ll lose $1 of benefits for each $2 of earnings above the limit, or $500 of his benefits for 2024.
In the year you reach FRA, benefits are reduced only for the months of that year before you reach FRA. You lose $1 of benefits for each $3 you earn above the limit up to that point. And the earnings limit for that year is much higher than for the earlier years—$59,250 in 2024.
Only the earnings from the beginning of year to the day you reach your FRA count against the earnings limit. If you don’t exceed the earned income limit by the day you reach full retirement age, benefits aren’t reduced for the year, even if you keep earning income for the rest of the calendar year and the total exceeds the limit.
Suppose you will reach your FRA in August 2024. You expect to earn $83,000 in income from working during the year but only $59,690 of it will be earned from January through July. That will put you only $440 over the earnings limit ($59,690 minus $59,250). Your benefits for the year will be reduced by only $146.70.
The earnings limits apply only during months when you’re both working and receiving retirement benefits. If you don’t claim retirement benefits until sometime after January 1, then your earnings before you began receiving benefits don’t count toward the limit. Instead, the annual limit will be prorated based on the number of months you receive retirement benefits.
Only wages and salaries from jobs you work and your net profits from self-employment count toward the earned income limit. Earned income includes bonuses, commissions, and vacation pay. Income that doesn’t count towards the earnings limit includes pensions, annuities, investment income, interest, jury duty pay, and veterans’ or other military or government retirement benefits.
The additional earnings are added to your lifetime earnings record and can increase future Social Security benefits. Whenever the current year’s earnings exceed the earnings of a year that was included in your highest thirty-five years of earnings, the SSA will recalculate your earnings record and increase your future Social Security benefits.
The loss of benefits is only temporary. After you reach your FRA, the benefits that were forfeited in earlier years because of the earnings limit will increase your future benefits. Exceeding the earned income limit is more of a deferral or withholding of benefits than a loss of benefits.
The calculations for increasing your future benefits after losing some because of the earnings test are complicated. But Social Security will adjust your monthly benefit for the amounts deferred and will adjust them for inflation.
When you want to know the effects of working while receiving Social Security benefits, on both current and future benefits, the best approach is to use the Social Security benefit calculators available on the web. There’s one on the Social Security web site, and others available for modest fees at socialsecuritysolutions.com and maximizemysocialsecurity.com.
Run different scenarios through the calculators to get an idea of the likely results of your different choices.