Social Security earnings test: How your benefits could be impacted

In 2024, more than 71 million Americans receive benefits from the Social Security Administration (SSA) per month. But for many, this money is not enough and with the rising cost of living, retirees may consider re-entering the workforce on a part-time or full-time basis. However, earning an income may reduce the amount of your Social Security check. Here’s how working while receiving Social Security could impact your benefits.

How does Social Security work?

Since 1935 Social Security has been an important source of income for retired workers and others. It offers a monthly benefit in the form of cash to its recipients. As of December 2023, the average monthly check is $1,767.03, according to the SSA. Social Security is funded by a tax set by statute. Employees pay 6.2 percent of their income, up to the maximum income limit ($168,600 in 2024), while your employer kicks in another 6.2 percent of your salary. If you’re self-employed, then you’ll pay the entire 12.4 percent yourself. Retirees can claim their full benefit at full retirement age, which depends on their birth year. For example, the full retirement age is 66 for those born from 1943 to 1954 and increases gradually to 67 for those born from 1955 to 1960. For anyone born in 1960 or later, full retirement benefits are payable at age 67. Retirees can file for their benefit as early as age 62, but Social Security will reduce that benefit for every month that it’s claimed before the recipient’s full retirement age. If you filed as soon as possible and your full retirement age is 67, then you’d receive only 70 percent of your full benefit. This reduction in benefits is permanent. In addition, Social Security imposes a temporary benefit cut if you claim early benefits while still continuing to work. It uses a retirement earnings test to determine whether your benefits should be cut and by how much.

What is the Social Security retirement earnings test?

The SSA sets an earnings limit for those who continue to work and collect Social Security before reaching full retirement age. How much you can earn without reducing your benefit depends on your age, whether it’s before you reach full retirement age, during the year you hit full retirement age or after you reach that age.

• If you’re before full retirement age: Those earning more than the earnings limit ($22,320 for 2023) will have $1 withheld from their Social Security benefit for every $2 earned above the limit.
• If you’re turning full retirement age this year: Those earning more than the earnings limit ($59,520 for 2024) will have $1 withheld from their Social Security benefit for every $3 earned above the limit. The earnings limit applies only to the months before you reach full retirement age, not your earnings for the full year.
• If you’ve reached full retirement age: Once you’ve reached full retirement, there is no limit on how much you can earn, and your earnings have no impact on your Social Security benefit.

For the earnings limit, the SSA does not count income from other government benefits,  investment earnings, interest, annuities and capital gains. However, it does count an employee’s contribution to a pension or a retirement plan if the amount is included in the employee’s gross wages. For the self-employed, the SSA counts only net earnings and considers the number of hours worked in the business in the month before full retirement age. If the individual reached a “substantial services” threshold, their benefit may be reduced. While the earnings limit reduction is in effect, the reduction is not taken gradually. Social Security could withhold several months of checks until the earnings test overpayment is “paid off.” Under the SSA regulations, rules for spouses claiming survivor benefits differ slightly in regards to full retirement age, depending on the age of both spouses and when and if benefits commenced. The earnings test does apply until full retirement age in this situation as well.

When are lost Social Security benefits recouped?

Any reductions to Social Security payments due to earning too much are temporary. Once workers reach full retirement age, they receive credit for their reduced benefits, and the SSA recalculates the monthly benefit at that time. However, this credit is not restored all at once and is usually made up a little each year, and could take up to 15 years to completely recoup lost benefits. Over a typical lifespan, those who are subject to the retirement earnings test do recoup most or all of the benefits withheld.

Bottom line

Those thinking about filing for early Social Security benefits should carefully consider whether they’ll need to continue working before they reach full retirement age. If so, they’ll want to figure out whether the earnings limit will affect their benefit check and by how much. It can be a costly mistake, so it’s all the more reason to consider the best age to claim Social Security benefits. Finding the right time to claim Social Security benefits can be a complex decision, so it’s useful to consult with a financial advisor to find the best options for your individual situation.