Studying the Earnings Test
More than 2.7 million jobs were created in 2014, providing new opportunities for people of all ages.1 This is good news, but what happens if you find a good job after you’ve already filed for Social Security?
You may have heard that the retirement earnings test (RET) could reduce your benefits. This shouldn’t stop you from taking the right job, but it’s important to understand this provision before you receive your first paycheck. Here are the basics:
- The RET applies only if you are working and receiving Social Security benefits before reaching full retirement age (66 to 67, depending on birth year).
- If you are under full retirement age for the entire year in which you work, $1 in benefits will be deducted for every $2 in gross wages or net self-employment income earned above the annual limit ($15,720 in 2015). Special rules, using a monthly limit, apply during the year you file for benefits.
- In the year you reach full retirement age, the reduction in benefits is $1 for every $3 earned above a higher annual limit ($41,880 in 2015). Starting in the month you reach full retirement age, there is no limit on earnings or reduction in benefits.
- The Social Security Administration (SSA) may begin to withhold benefits as soon as it determines that your earnings are on track to surpass the annual limit.
Even though the RET may seem like a stiff penalty, the deducted benefits are not really lost. Your Social Security benefit amount is recalculated after you reach full retirement age. For example, if you claimed benefits at age 62 and forfeited the equivalent of 12 months’ worth of benefits by the time you reached your full retirement age (66), your benefit would be recalculated as if you had retired at 63 instead of 62. In this case, the benefit reduction would be 20% instead of 25%, and you would receive this higher benefit for the rest of your life.
The RET applies only to wages and self-employment income, not to income from investments, pensions, or withdrawals from retirement accounts. Regardless of your age, keep in mind that you must pay Social Security and Medicare payroll taxes on your earnings.