• Chris Stein, CFP®

How Does the Earnings Test Affect My Monthly Benefit?

You may be aware of the Social Security Earnings Test, but you may not know how it will directly affect your Social Security benefit payments. Will SS hold back a portion of your monthly benefit? Will they withhold a lump-sum amount? Or will they not pay you at all? I recently received a question from a reader that addresses just this topic.

Earnings Test Question

His question reads in part:

I just turned 62 and my full time hours were reduced. I need the extra income and want to collect my Social Security benefit while working. My monthly SS benefit will be $1780. Social Security will allow me to earn $1410 monthly, but the wages from my job will put me over that amount by $1200 a month. Because of this $1200 overage, SS will reduce my monthly amount by $600. When I apply for my benefit in May, will Social Security withhold $4800 up front ($600 X 8 months) and then resume sending me monthly benefits? Or will SS not send me any of my benefit since I will make over the $1410 limit?

Our reader (let’s call him George) has the core of the earnings test issue, but not quite the whole picture.

Earnings Limit

If you’re claiming your SS benefit before your full retirement age (FRA),the earnings limit in 2017 is $16,920 a year or $1410 a month. For every 2 dollars that are earned over the limit, SS withholds 1 dollar of your benefit. For George, this means a $600 a month reduction in his benefit ($1200 divided by 2).

Social Security will affect this reduction one of two ways.

Option 1

If George does not tell SS that he is still working when he files for his benefit in May, SS will send him his full $1780 benefit a month. At the end of the year, since money was not withheld from his benefit, SS will withhold all payments in 2018 until the amount of overpayment ($4800) has been made up. They will then resume sending George his benefit, minus the $600 reduction.

Option 2

If George is up front and tells SS about his income when he files for his benefit, SS will immediately start reducing his benefit payment by $600 a month. They will not withhold the amount as a lump sum.

Most people choose the second option and by rule, this is what you’re supposed to do. There is no penalty if you don’t, aside from the fact that SS will withhold your entire benefit in the following year until the overpayment has been reconciled. SS will also give you the option of paying them back by writing a lump sum check.

No Earnings Test After FRA

Just as a reminder,when you reach your full retirement age the earnings test goes away completely. Also, the money that was “lost” to the earnings test isn’t really lost. When George reaches his FRA, SS will recalculate his benefit. This is to make up for the fact that while he was working, they withheld some of the benefit he was entitled to.

For more information on this topic, please use the play button below.


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