• Chris Stein, CFP®

What is the Earnings Test?

Social Security was originally designed to replace a portion of your income after you retire.  Yet for a variety of reasons many people file for their Social Security retirement benefits early while continuing to work.  Depending on what age you file for your benefits and how much you earn in wages while collecting Social Security, some or all of your benefits may be reduced. The exact amount of your reduction depends on a series of reduction formulas contained in the Social Security Earnings Test.

Reduction Formulas

Before applying any reduction formula to your benefits, the Social Security Administration (SSA) will first consider your age. If you’re still working but file for your retirement benefits after reaching your Full Retirement Age (FRA) there is no problem. This is because the SSA does not penalize a person for working after their FRA. However, if you claim early ─ that is to say if you file for your Social Security retirement benefits before reaching your FRA and you continue to work, then your benefits may be partially or fully reduced.

Just because you file for benefits early while continuing to work doesn’t mean your benefits will automatically be reduced. This is because the SSA will apply a second measure called the Earnings Test, where they apply a reduction formula to a person’s Social Security retirement benefit depending on how much that person earned in W2 wages. In 2014 that limit was $15,480 of W2 wages (in 2016 that number is $15,720).  If you earn more than this amount, the SSA will reduce your benefits $1 for every $2 earned over the limit.  This reduction is not permanent.  Once you reach your FRA the SSA will recalculate your monthly benefit to account for any benefits they withheld prior to your FRA.

Special Provision

There is also a special provision in the Earnings Test that applies beginning in the year an individual will reach their FRA and lasting until the first day of the month they actually reach their FRA.  For 2014 an individual could earn up to $41,400 in W2 wages during this time period before the SSA reduced their retirement benefit. (In 2016, that amount is $41, 880.)  Further complicating matters, the SSA will only reduce your benefit $1 for every $3 earned over this amount. This little known rule effectively allows someone to earn considerably more income in the year they reach their FRA before any reduction to their Social Security retirement benefit takes effect.

The Social Security Earnings Test can be a complex topic.  Please use the play  button below to listen to our audio blog for a more thorough explanation and examples of how the Earnings Test works. If you do listen to our audio post, please be aware that the original was recorded in 2014. The total amount an individual can earn has changed.


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