What you need to know about the Social Security Earnings Test

If you claim Social Security benefits and you are younger than your full retirement age of 65 to 67 (depending on your year of birth), you will be subject to an earnings test and may have to repay benefits that you have already received. According to the health and retirement demographic study from the University of Michigan and funded by the National Institute on Aging, more than half of baby boomers born from 1948 to 1953 returned to work either part-time or full-time before permanently leaving the workforce. Half of those who returned to work reported receiving Social Security retirement benefits before returning to work. Of these people, 40% were below FRA when they returned to work. Let’s face it, 62 is not that old anymore, at least not according to baby boomers – millennials may not agree!  

Did you know that as of June 2023, according to the Social Security Administration, nearly nine out of 10 Americans age 65 and older were receiving Social Security? For most of these folks, their FRA for Social Security benefits occurs after age 65. If you were born in 1943 through 1954, your FRA for Social Security is 66 and if you were born in 1960 or later, your FRA is 67. According to recent Social Security statistics, nearly 30% of retired workers claim their Social Security benefits at age 62. Here’s a breakdown by age: 

• 62:  29% 
• 63:  7% 
• 64:  8% 
• 65:  13% 
• 66:  25% 
• 67:  4% 
• 68:  2% 
• 69:  2% 
• 70 and older*: 10% 

*There is no reason to delay claiming past age 70. Social Security recomputes your benefit annually. Each year, earnings records are reviewed for all Social Security beneficiaries who have wages reported for the previous year. If your latest year of earnings is one of your highest years, your retirement benefit will be recalculated, and you will receive an increase if you are due. The increase is retroactive to January of the year after you earned the money. 

Why do so many people claim reduced Social Security benefits at age 62 rather than waiting to receive 100% of their earned benefit a few years later?   

According to a recent article from the nonpartisan Center for Budget and Policy Priorities, some people simply cannot work any longer. The article explains that among people who claim as soon as they are eligible, 28%t of women and 20%of men had already stopped working before age 62. This may be due to health conditions: about 40% of people in their early 60s report a potentially disabling condition, but less than half of them ever receive disability benefits. Or it could be because of job loss: 4 out of 10 recent retirees report being forced out of their jobs, and many struggle to find other work. Many early retirees also have significant caregiving responsibilities — often for ailing parents or spouses, or for grandchildren. 

Another reason to claim Social Security retirement benefits at age 62 is because you have fully retired, and you need the income provided by Social Security to afford retirement. Finally, it could be that you know that regardless of claiming early or waiting until later, you will receive essentially the same total benefit amount if you live to see age 82. If you die early, there is an even stronger case for claiming early.   

However, there are two strong reasons to consider delaying claiming Social Security: 

1. You might live a long time and a larger payment in your 80s, 90s and beyond may be important if you are no longer able to work to supplement your income or have spent your retirement savings too quickly. 

2. Many people continue working past age 62 due to financial need or by choice.  If you earn too much, your benefit will be reduced or terminated depending on the amount your earnings exceed an annual limit.  

What is the earnings test and how can it result in an overpayment? 

If you have filed for your Social Security retirement benefit and you are under your FRA, the earnings limit for 2024 is $22,320/year ($1,860/month). This means that you can earn up to $22,320 and continue to receive your Social Security retirement benefit.  

However, if your income exceeds this amount, then your Social Security benefit will be reduced by $1 for every $2 you earn over the limit. In the first year of receiving benefits, a monthly limit is used so that the earnings you had prior to receiving benefits are not counted against the earnings test.   

Let’s look at example of how this works: 

Melissa filed for Social Security in 2023 when she turned 62. Her full benefit payable at age 67 is $3,220/month. Since she filed at age 62, her benefit has been reduced by 30% (5/9 of 1% per month for the first 36 months and then 5/12 of 1% for the remaining 24 months) to $2,254/month. At the time she filed for benefits, she wasn’t working, but this year, in 2024, she decided to return to work and expects to earn $40,000 in 2024 by the end of the year. This is $17,680 ($40,000 - $22,320) over the $22,320 limit for this year. Her benefit will be reduced by $8,840 ($1 for every $2 over $22,320). For four months, Mellissa will receive $0 benefits (4 x $2,254 = $9,016). Her $2,254 benefit would resume in the fifth month. Since her benefit was reduced more than necessary, she will receive an additional $176 in 2025 ($9,016 - $8,840). If she continues to work, this same method will be applied to her benefits each year until the year she reaches her FRA (67 since she was born in 1961).  In the year that she turns 67, she can earn a higher amount and only earnings prior to the month she turns 67 will count against the higher earnings limit. For 2024, the FRA year earnings limit is $59,520 and the reduction for excess earnings is $1 for every $3 over the limit.     

But exactly how does this cause your benefit to be reduced?   

If a person is aware of the earnings limit and they notify SSA of expected earnings, then they won’t be surprised when the earnings test is applied. SSA’s Office of the Chief Actuary (estimated in 2019 that about 520,000 beneficiaries aged below FRA had their benefits reduced or entirely withheld due to the earnings test that year. Each year, beneficiaries are supposed to report their predicted earnings for the upcoming year to SSA. SSA policy instructs staff to encourage high earnings estimates from beneficiaries to avoid overpayment. Beneficiaries are also advised to contact SSA if there are any changes to their expected earnings. SSA can use earnings information from W-2s and self-employment tax returns instead of self-reports from beneficiaries.   

If a beneficiary does not report their earnings to SSA, they may be subject to overpayment and may face a penalty if they knowingly failed to report their earnings in a timely manner. Determining income under the retirement earnings test is more complicated for self-employed earners and certain categories of earnings, such as royalties. When Social Security figures out how much to deduct from your benefits, they only count the wages you make from your job or your net profit if you're self-employed. They also include bonuses, commissions, and vacation pay. Social Security doesn’t count pensions, annuities, investment income, interest, veterans' benefits, or other government or military retirement benefits. If you receive benefits and are under FRA and you think your earnings will be different than what you originally told Social Security, let them know right away. There may be a silver lining: 

For those individuals who were subject to the earnings test and had their benefits terminated for a period, this will result in an adjustment to their Social Security benefit at their FRA. In the above example, Melissa turns 67 in January 2028. At this time, the actuarial reduction factors used to reduce her benefits for early retirement are adjusted for the months when her benefits were withheld or reduced due to the earnings test. Her benefit was originally reduced from $3,220 to $2,254 because she claimed 60 months before reaching her FRA. However, she had four months of benefits fully or partially withheld due to the earnings test. At FRA, her benefit amount is recalculated to account for 56 months of early claiming instead of 60 (60 - 4). Her new benefit amount is $2,308. She will receive this amount for the remainder of her life. In addition, if the earnings Melissa had in any year after she applied for Social Security were higher than an earlier year of earnings, then her average lifetime earnings amount would have increased resulting in a larger benefit amount.   

Note: Cost-of-living adjustments were ignored in this example for simplicity.