The Social Security retirement earnings test impacts individuals who receive benefits while still working before reaching their full retirement age. It is crucial to understand the rules and implications of this test, as it can significantly affect benefit amounts. This article explores the earnings test, its effects on Social Security benefits, and strategies for navigating its complexities.
Earnings Test Fundamentals
The retirement earnings test applies to beneficiaries who have not yet reached their full retirement age (FRA) and are receiving Social Security retirement, spousal, or survivor benefits. If these individuals continue working and earn above certain thresholds, a portion of their benefits will be temporarily withheld. Once they reach their FRA, the earnings test no longer applies, and benefits are paid in full regardless of income.
It is essential to note that any amounts withheld are not permanently lost. When individuals reach their FRA, the Social Security Administration (SSA) recalculates the withheld amounts, resulting in higher future payments. This adjustment is designed to compensate for the benefits that were previously withheld.
Understanding Earnings and Exemptions
The earnings test considers only earned income, which includes wages, bonuses, self-employment income, and certain deferred compensation. Conversely, several income sources do not count towards the earnings test. These include pensions, investment income, and rental income (unless actively managed).
In 2025, the earnings test thresholds are set at $23,400 annually for individuals under FRA, increasing to $24,480 in 2026. For every $2 earned over this threshold, $1 is withheld from Social Security checks. The threshold for the year in which a beneficiary reaches their FRA is significantly higher, set at $62,160 annually, with a similar deduction rule.
Monthly earnings limits also apply, particularly for those who begin receiving benefits midyear. In 2025, the monthly threshold stands at $1,950, rising to $2,040 in 2026. If earnings exceed this limit in any given month, benefits are withheld for that month.
Example Scenarios
To illustrate how the earnings test functions, consider an individual who filed for benefits in January 2024 at age 63, receiving a monthly benefit of $1,500. If this person earns $35,000 that year, their excess earnings would be calculated as $35,000 minus $23,400, resulting in $11,600. This amount would lead to a withholding of $5,800, meaning benefits would not be paid for the first four months of the year, resuming in May.
In another scenario, an individual who filed in June 2024 at age 64 and earned varying monthly amounts would not receive benefits in June and July if those months exceeded the monthly earnings limit. However, benefits would be paid for subsequent months when earnings fell below the threshold.
Recalculation of Benefits After Reaching FRA
Once a beneficiary reaches their FRA, the SSA recalculates the total amount withheld and converts it into months of credit. For instance, if an individual collects $2,000 per month and earns above the threshold for two years, resulting in a total withholding of $12,000, this amount would be credited as if the individual had delayed filing for benefits by one year. This adjustment significantly increases the monthly benefit going forward.
Avoiding Overpayments
Occasionally, the SSA may overpay individuals subject to the earnings test, prompting an overpayment recovery process. Beneficiaries will receive a notice detailing the amount overpaid and options for repayment. They may repay the entire amount as a lump sum or opt for monthly deductions from future benefits.
Beneficiaries can appeal the overpayment decision by filing a request for reconsideration within 60 days or request a waiver if repayment causes financial hardship.
Strategies for Beneficiaries
To minimize the impact of the earnings test, beneficiaries can adopt several strategies. Timing the filing date to align with lower earnings years can help avoid penalties. Accurate tracking and reporting of earnings are essential to prevent overpayment issues. Additionally, delaying benefits until reaching full retirement age can allow individuals to avoid the earnings test altogether.
Understanding the intricacies of the Social Security earnings test is vital for beneficiaries who continue to work while receiving benefits. By grasping the rules, limits, and exceptions, individuals can optimize their benefits and effectively plan for retirement.
