Will My Social Security Benefits Be Affected if I Work?

It is tempting to increase income once a wage earner is eligible for Social Security—at age 62—by taking benefits early. However, those benefits are likely to be temporarily reduced because of earned income. The “retirement earnings test” is complicated and, thus, poorly understood by the public, as reported in an article from CNBC, “Social Security rule for beneficiaries who keep working is ‘poorly understood,’ report finds. This is from a study conducted by the Social Security Advisory Board, a bipartisan, independent federal agency.

According to the study, between 20 percent and 50 percent of pre-retirees do not know their monthly benefits may be lowered if they claim Social Security and continue working.

Even wage earners who know their benefits might be reduced do not know this is a temporary reduction. As few as 30 percent to 40 percent understand the reductions will eventually be added back to their benefits when they reach their full retirement age ("FRA").

Here’s how the retirement earnings test works. It applies to Social Security beneficiaries under FRA, generally between ages 66 and 67, depending on their date of birth. A beneficiary under FRA who continues to work will have their benefits cut by $1 for every $2 earned in 2024. The rule applies to income over $22,320.

The rule differs for the year a beneficiary reaches their FRA when $1 is deducted for every $3 earned over a separate limit. In 2024, this applies to earnings over $59,520 only for the months before a beneficiary reaches full retirement age.

Today’s wage earners are more likely to remain in or move in and out of the workforce before fully retiring, so this rule will likely impact more people.

The Social Security Administration’s policy directs the field office staff to discuss the retirement earnings test with all applicants. However, this doesn’t always happen, according to the Society Security Advisory Board. These conversations also do not always happen with prospective beneficiaries who have stopped working.

The report recommends making the information on the Social Security website more accessible and doing the same for related tools on the website.

Misunderstanding the retirement earnings test often influences workers to delay claiming benefits until full retirement age. Waiting to claim at full retirement age means workers receive all the benefits they earned, while those who claim earlier have permanently reduced benefits.

For most people affected by the retirement earnings test, there is no effect on the amount of their lifetime benefits but not understanding the rules may keep them from enjoying more income in their senior years.

As beneficiaries continue to work, they also pay Social Security payroll taxes. This could increase their benefits if the earnings fall within their highest earnings years.

Beneficiaries must properly report wages, as the IRS reports wages to the Social Security Administration. If it is determined benefits have been overpaid, the Social Security Administration will withhold benefits until the sum is recouped. This is a situation to avoid.

Reference: CNBC (Dec. 20, 2023) “Social Security rule for beneficiaries who keep working is ‘poorly understood,’ report finds