The Social Security rules are extraordinarily complex and create a virtual labyrinth that retirees must successfully navigate to get the most out of the system they have likely been paying into for most of their lives. In particular, the timing of when benefits are claimed can have a significant impact, not only because benefits are adjusted (i.e., reduced) for those who retire “early,” but also because the so-called Social Security Earnings Test applies to anyone who receives Social Security benefits early. Many retirees—and advisors—don’t fully understand how the Earnings Test works. This Nerd’s Eye View post looks at multiple possiblities, with examples.
Under the Earnings Test rules, if an individual is under their Full Retirement Age for all of 2019, then Social Security will withhold $1 of benefits for every $2 of earnings over the annual $17,640 limit. Similarly, if an individual reaches their Full Retirement Age in 2019, then the annual Earnings Limit threshold is increased to $46,920, and Social Security will withhold “only” $1 of benefits for every $3 of earnings over that amount. And notably, only earnings attributable to work performed before an individual reaches their Full Retirement Age counts toward that total.
Thankfully though, benefits “lost” to the Earnings Test aren’t generally lost forever. Instead, when an individual reaches Full Retirement Age, the Social Security Administration will recalculate the individual’s Earnings-Test-reduced-benefit, reducing the actuarial reduction for claiming early by the number of months in which no benefits were received due to the Earnings Test. There are, however, some situations in which benefits withheld by the Earnings Test truly are lost forever. Such scenarios include situations in which a Social Security recipient does not live long enough to reap the benefits of an actuarial reduction, and those where an individual who is already past their Full Retirement Age is eligible for spousal benefits, but has spousal benefits withheld due to a younger working spouse’s earnings.
What about intra-year timing? Or when only one spouse works? What counts as earned income? Does the Earnings Test affect different benefits differently? Keep reading to find out.