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Social Security earnings test: How your benefits could be impacted

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By 2023, around 67 million Americans will receive monthly benefits from the Social Security Administration (SSA). Despite this, some may find the money insufficient, especially with the increasing cost of living. Retirees might consider rejoining the workforce either part-time or full-time, but doing so may decrease their Social Security check.

Here is how having a job while receiving Social Security benefits may affect the amount of your benefits.

How does Social Security work?

Social Security has been providing retired workers and others with a valuable source of income since 1935. Recipients receive a cash benefit on a monthly basis. As of February 2023, the SSA reports that the average monthly check is $1,693.88.

The funding for Social Security is done through a legally established tax. As per this tax, employees contribute 6.2 percent of their salary until a maximum income limit of $160,200 in 2023. Employers are also required to contribute 6.2 percent of their employees’ salaries. If you are self-employed, you will be responsible for paying the entire 12.4 percent tax yourself.

To receive their full retirement benefit, retirees must reach their full retirement age. This age is determined by their birth year. For those born from 1943 to 1954, the full retirement age is 66. For those born from 1955 to 1960, the full retirement age gradually increases to 67. Those born in 1960 or later can claim their full retirement benefits at age 67.

You can start receiving your retirement benefits from Social Security at the age of 62, but if you claim it before your full retirement age, your benefit will be reduced every month. For example, if your full retirement age is 67 and you file for benefits at 62, you will only receive 70% of your full benefit. It’s important to note that this reduction in benefits will stay permanent.

Additionally, if you continue working and claim early Social Security benefits, you may experience a temporary reduction in benefits. Social Security uses a retirement earnings test to calculate the amount of the reduction.

What is the Social Security retirement earnings test?

The Social Security Administration (SSA) has a limit on how much you can earn if you are collecting Social Security before you reach full retirement age and still working. The amount you can earn without reducing your benefit depends on your age and whether you have reached full retirement age.

  • If you’re before full retirement age: If you earn more than $21,240 in 2023, your Social Security benefit will be reduced by $1 for every $2 earned above the limit.
  • If you’re turning full retirement age this year: If you earn over $56,520 in 2023, $1 will be withheld from your Social Security benefit for every $3 earned above the limit. This limit only applies to the months before you reach full retirement age, not your earnings for the entire year.
  • If you’ve reached full retirement age: When you reach full retirement age, your Social Security benefits are not affected by how much you earn. This means that there is no limit on how much you can earn.

The SSA only counts an employee’s contribution to a pension or retirement plan towards the earnings limit if it’s included in their gross wages. Income from other government benefits, investment earnings, interest, annuities, and capital gains are not counted towards the limit.

If you work for yourself, the Social Security Administration only counts your profit and the number of hours you worked in the month before you reach full retirement age. If you worked a lot of hours and made a lot of money, your Social Security benefit may be lower.

Social Security may withhold multiple monthly checks during the earnings limit reduction until the earnings test overpayment is fully paid off. This reduction is not applied gradually.

The regulations of the SSA have different rules for spouses who want to claim survivor benefits. The rules vary based on the age of both spouses and when they began receiving benefits. Additionally, the earnings test is applicable until the full retirement age, even in this case.

When are lost Social Security benefits recouped?

The Social Security payments reduction for earning too much is temporary. The reduced benefits will be credited once workers reach full retirement age, and the SSA will recalculate the monthly benefit.

The withheld credit is not restored immediately but instead gradually over time, typically taking up to 15 years to fully recoup lost benefits. However, most individuals subject to the retirement earnings test will recoup all or most of their withheld benefits over the course of their lifespan.

Bottom line

If you are considering applying for Social Security benefits before reaching full retirement age, it’s important to determine if you will need to keep working. If you do, you should understand how the earnings limit could impact your benefit amount. This is a crucial decision with potentially expensive consequences, which is why you should carefully consider the optimal age to claim Social Security benefits.

Consulting with a financial advisor can help you find the best options for your individual situation when it comes to claiming Social Security benefits, as it can be a complicated decision.

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