If you claim benefits early, income from work can reduce your monthly payments
“Retirement” used to be synonymous with “not working.” Not anymore.
More than a quarter of U.S. adults ages 65 to 74 are still in the workforce, according to the federal Bureau of Labor Statistics, and that share has been rising steadily for decades. Nearly three-quarters of currently working adults polled for the Employee Benefit Research Institute’s 2023 Retirement Confidence Survey said they expect to continue working for pay in retirement.
Some need the income to cover their bills. Some like the job they have, hanker for a second career or simply want to stay busy. And many are also receiving Social Security.
Buttressing your paycheck with a Social Security check can be tempting. “Who doesn’t want extra money?” asks Spencer Betts, a certified financial planner with Bickling Financial Services, a Boston-area firm. But that extra money can come with a significant downside.
Social Security maintains a “retirement earnings test” for people who claim benefits before reaching full retirement age (FRA), currently between 66 and 67 depending on your year of birth. If your work income exceeds a certain threshold, the Social Security Administration (SSA) temporarily withholds a portion of your monthly payment. That’s on top of the benefit reduction that comes with starting Social Security before FRA.
Unwelcome news
The test is a legacy of a founding principal of Social Security. When President Franklin D. Roosevelt signed the program into law in 1935, it was intended to support those no longer able to earn money from work. Amendments enacted four years later set the earnings limit at $15 a month (about $332 in 2023 dollars).
The policy has substantially evolved since then, but the idea essentially is the same: You get your entire benefit when the SSA considers you fully retired.
That’s news to many newly minted beneficiaries. Fewer than half of U.S. adults ages 25 to 66 surveyed by AARP for a November 2023 report on Social Security knowledge were aware that holding a $40,000 job while collecting retirement benefits at age 62 would reduce their monthly payments.
And when Social Security discovers it’s been “overpaying” you while you’re working, it will seek to get that money back.
“A lot of people don’t even realize there’s an earnings limit until they receive their first overpayment notice,” says Jim Blair, a former SSA district manager in Ohio and the cofounder of Premier Social Security Consulting in Cincinnati.
In 2024, the earnings limit for most Social Security recipients under full retirement age is $22,320 (up from $21,240 in 2023). Work income up to that level is exempt, but you lose $1 in benefits for every $2 in earnings over the cap. Suppose you have a part-time job that pays $40,000 a year. Your benefits for 2024 would be reduced by $8,840 — half the difference between $22,320 and $40,000.
It isn’t just income from a salaried job. “That includes earnings from W-2 wages, but also the net self-employment income if they’re driving an Uber or something,” says Luis Rosa, a certified financial planner at Build a Better Financial Future in Pasadena, California.
Here are seven things you need to know if you continue to work while receiving Social Security.
1. Not all income counts
Only earnings from work count toward the limit. “They don’t count things like pensions, annuities, investment income or any bank interest,” Rosa says. Ditto rental income, inheritances, distributions from retirement accounts or other forms of “unearned” income.
The SSA does count some forms of work-related income that aren’t from a salary or hourly wage, including bonuses, commissions, consulting fees, severance pay, and unused vacation or sick days.
Unemployment benefits do not count. And household income isn’t a factor: Social Security does not count your spouse’s earnings, or those of any live-in children, toward your earnings limit — only your own work income.
2. The test doesn’t just apply to retirement benefits
You’re subject to the earnings test if you collect Social Security spousal or survivor benefits before reaching full retirement age. The income threshold is the same, as is the amount of withholding if you exceed it.
There are separate earnings rules for people receiving Social Security Disability Insurance (SSDI). To qualify for SSDI, you must be unable to engage in what the SSA terms “substantial gainful activity.” In 2024, that means work that pays more than $1,550 a month for most people with disabilities or $2,590 for those who are blind. If you earn more, you could lose your disability benefits.
3. You should report earnings ahead of time
If you’re subject to the earnings test, tell the SSA what you expect to earn in the coming year by calling the national help line (800-772-1213) or contacting your local Social Security office. Based on that estimate, the agency will calculate the effect of the earnings test and suspend your monthly payments until you cover what you “owe.”
Take our hypothetical beneficiary who’s due to lose $8,840 to the earnings test in 2024. Let’s say her regular Social Security benefit is $1,500 a month. She would not get payments for six months, thus paying off $9,000. She’ll get her normal monthly payment the rest of the year, and the SSA will subsequently repay the $160 in extra withholding.
The following year, when the SSA gets documentation of your actual income via W-2s and other tax records, they’ll adjust the withholding accordingly, depending on how that figure compares with your prior income estimate.
“Once they know what the actual earnings are, they’ll decide, ‘Did we withhold enough? Did we withhold too much?’ ” Blair says. “I tell clients it’s better to overestimate what they’ll earn rather than underestimate. If you overestimate, you get a check back from SSA with the amount they should have paid you. But if you underestimate, you’ll have to pay them.”
4. The rules change as you near full retirement age
In the calendar year in which you will reach FRA, the retirement earnings test gets less onerous. During this period, you’ll lose $1 in Social Security benefits for every $3 in work earnings above a higher cap — in 2024, it’s $59,250.
When you hit full retirement age, the limit goes away altogether. From that month, you can earn any amount from work and it won’t reduce your monthly payment. In fact, your payment will go up, because …
5. Social Security pays you back
Over time, Social Security repays the money withheld under the earnings limit, starting when you reach FRA.
You won’t get it back in a lump sum. Instead, they will add money back to your monthly benefit, allowing you to recoup most, if not all, of the money withheld.
Say you claimed benefits four years before reaching FRA and lost three months of payments a year to the earnings test. Social Security will credit you for those 12 months by recalculating your benefit as if you’d filed three years early instead of four.
6. There’s a different test if you got benefits only part of the year
The earnings test is based on full-year income figures, but the SSA understands that most people don’t wait until Dec. 31 to claim benefits. What happens if you start Social Security on, say, Oct. 1, and you’ve already earned $50,000 by then?
“Going by the annual amount, [the SSA] would say, ‘We can’t pay you October through December,’ ” Blair says. But they don’t go by the annual amount — that would be penalizing you for money you earned before claiming your benefit.
Instead, Social Security will apply a special monthly test, sometimes called the “first year” rule, for those three months: If you earn less than $1,860 (one-twelfth of $22,320) for the month, you get your whole benefit payment. If you earn more than that, the $1-for-$2 withholding rule applies.
The monthly test may be used in a few other circumstances — for example, if you have what Social Security calls “break in entitlement” when moving from one type of benefit to another. But whatever you use it for, you can only use it once. Come the next year, the regular yearly test takes over.
7. Continuing to work may increase your benefit
Social Security bases your benefit amount on average monthly income over your 35 highest-earning years, adjusted for historical wage growth. Even if you have already claimed benefits, they recalculate your payment annually based on inflation and work income, if any.
What does that mean for you? If you continue to work and make decent money, that could displace lower-earning years from your top 35, increasing your lifetime monthly average income.
So, if you worked in 2023, the SSA “will go back and say, ‘OK, what you earned in 2023, was that higher than the lowest year we used in your computation?’ ” Blair says. “They’ll drop off the low year and add in the new high year and that increases [your benefit].” There’s no effect on your payment if your income is too low to crack the top 35.
https://www.aarp.org/retirement/social-security/info-2023/working-and-your-monthly-benefit.html
