In a nutshell, this is how work affects your Social Security benefits: You may be able to collect Social Security retirement and survivors benefits even if you work. However, if you are under full retirement age (age 67 for anyone born 1960 or later)1, some of your benefits may be withheld if you earn over a certain amount. If any benefits are withheld because of work, you will receive an increase in your benefit amount at full retirement age giving you credit for the previously withheld benefits. Your work and earnings for any year may also be used to increase the amount of your monthly benefit in the following year.
The effect of work on disability benefits differs from its effect on retirement and survivor benefits. A different set of rules applies to individuals receiving Social Security disability benefits. This discussion is limited to the impact of work on retirement and survivors benefits. These benefits include retirement, spouse’s (including divorced spouse’s), child’s, widow(er)’s (including surviving divorced spouse’s and), and parent’s benefits.
For purpose of simplicity, all examples provided below assume full retirement age is age 67.
The Work Test
If you work and are full retirement age or older, you may keep all of your Social Security benefits payable, no matter how much you earn. If you are younger than full retirement age, there is a limit on how much you can earn and still receive Social Security benefits. If you have not yet reached full retirement age in any month of 2023, you may earn up to $21,240 and still receive all benefits payable. If you earn over this amount, then $1 of benefits is deducted for every $2 you earn over $21,240.
If you reach full retirement age in 2023, you may earn up to $56,520 and still receive all monthly benefits in 2023. If you earn over this amount, then $1 of benefits is deducted for each $3 you earned above $56,520 in the months before the month in you reach your full retirement age.2
Let’s consider a couple of examples to illustrate these points:
Assume that you start receiving Social Security benefits at age 62 in January 2023 and your monthly benefit amount is $1,000 or $12,000 for the year. During the year, you work and earn $30,000. Since you earn over $21,240 in 2023, the Social Security Administration will withhold $4,380 or $1 for every $2 earned over $21,240. You would still receive $7,620 or the difference between $12,000 and $4,380.
$30,000 Annual earnings
-$21,240 Earnings limit
$ 8,760 Amount over the limit
$8,760 ÷ 2 = $4,380 Earnings offset
$12,000 Total yearly Social Security benefits
-$ 4,380 Earnings offset
$ 7,620 Social Security benefits payable
No benefits would be payable from January through April ($1000 x 4 months or $4,000). In May you would receive a partial monthly benefit of $620 ($1,000 - $380), and from June through December you would receive all monthly benefits payable ($1000 x 7 months).
Now let us assume that you start collecting Social Security retirement benefits in January 2023 at age 66, but you turn age 67 in July 2023. Your monthly benefit amount is $1,000 per month or $12,000 per year. You earn $120,000 for the year and $60,000 through the month of June, the month before you turn age 67. Since you earn over $56,520 in the months before you reach full retirement age, the Social Security Administration will withhold $1,160 or $1 for every $3 earned over $56,520. You would still receive $4,840 ($6,000 - $1,160) for the months prior to full retirement. You would receive $10,840 in benefits for the entire year ($4,840 + $6,000).
$60,000 Annual earnings through the month of June (the month before age 67)
-$56,520 Earnings limit
$ 3,480 Amount over the limit
$3,480 ÷ 3 = $1,160 Earnings offset
$ 6,000 Total benefits earned through the month of June (the month before age 67)
-$ 1,160 Earnings offset
$ 4,840 Social Security benefits payable prior to month of attainment of age 67
No benefits would be payable for January. In February you would receive a partial monthly benefit of $840 ($1,000 - $169), and from March through June you would receive your full monthly benefit ($1,000 x 4 months). Once you reach age 67, you are entitled to your full monthly benefit regardless of your earnings amount. You could earn a million dollars or more, and still receive all benefits effective with the month you reach your full retirement age.3
Countable Income
Not all income counts towards the work test. Only earned income counts, which includes wages, salary, tips, and net earnings from self-employment. Unearned income—such as dividends, interest, capital gains and pension income—does not count.4 Moreover, for purposes of the work test, income generally counts when it is earned, not necessarily when it is paid. If you receive income following your retirement, it is generally counted as income for the period earned, not when it is paid. Examples of income received after retirement may include accumulated sick and/or vacation pay and bonuses.5
Example: Your AGI on your form 1040 for 2022 shows $65,000. Of this amount $55,000 is wages, $5,000 is interest and dividends, and $5000 is capital gains. The amount of income that should be counted for the purpose of the work test is $55,000.
Example: You retire in January 2023 and receive a lump sum of $30,000 in the same month for sick leave and vacation pay accumulated in prior years. You do not need to count this $30,000 towards the work test for 2023.
The Grace Period
There are special rules that apply to earnings for one year, generally the first year of retirement. These rules are designed for people who retire later in the year and have already earned more than the annual earnings limit. It does not seem fair to withhold benefits from these individuals when they are no longer working. Under these rules, called a grace period or grace year, you can collect a full Social Security check for any complete month you are retired, regardless of your annual earnings. In fact, you can earn up to as much as 1/12 of the annual earnings limit each month and still receive your full benefit. What does this mean? An example, like a picture, is worth a thousand words.
Example: In 2023 Dylan who age 62 retires from a full-time job at the end of August after having earned $100,000 before retirement. For the rest of the year he works part time at a local grocery earning $1,000 per month. Dylan files for Social Security beginning with September and is entitled to a monthly benefit of $1,000. Because of the grace year, he can receive his full monthly benefit for each month in 2023 that he earns less than $1,770 (1/12 of the annual limit of $21,240. If Dylan receives more than $1,770 in any of the months from September through December, he will not receive a check for that month.
This grace year applies to the one year only. Continuing our prior example, beginning in 2024 the yearly limits now apply because Dylan is beyond his first year of retirement. For example, let us assume that he is promoted to a full-time position at the grocery store in April 2024. He earns $1,000 a month from January through March, and receives a salary of $90,000 for the rest of the year. Dylan will not receive a monthly check for January, February or March or for the rest of the year. This is because now only the annual earnings test (or work test) applies. Using the calculations explained before, we see that Dylan will not receive any Social Security benefits for 2011.6
$93,000 Annual earnings
-$21,240 Earnings limit (the earnings limit for 2011 is the same as 2010)
$71,760 Amount over the limit
$71,760 ÷ 2 = $35,88 Earnings offset
$12,000 Total yearly benefits
-$ 35,880 Earnings offset
Since Dylan’s earnings offset exceed his annual Social Security benefits, he will not receive benefits for any month in 2024.
Other Individuals Entitled on Your Record
If there are other individuals entitled on your record, your work may affect receipt of their benefits also. Most auxiliary benefits, such as child or spouse’s benefits, are offset due to the work and earnings of the number holder. For example, let us assume that both you and your non-working spouse start receiving Social Security benefits on your record in January 2023. You receive a retirement benefit amount of $1,600 and let us assume she receives a spouse’s benefit amount of $800 per month. You are under full retirement age and earning $70,000 a year. In this situation your wife would not be able to receive her full monthly benefits for the year on account of your work. Just as you would not receive your full yearly benefits, she would not receive her full yearly benefits also.
$ 70,000 Annual earnings
-$ 21,240 Earnings limit
$ 48,760 Amount over the limit
$48,760 ÷ 2 = $24,380 Earnings offset
$ 28,800 Total yearly benefits (retirement and spouse’s)
-$ 24,380 Earnings offset
$ 4,420 Social Security benefits payable
Neither of you would receive any Social Security benefits from January through October. In November you and your spouse together would receive $2,020; this partial monthly benefit amount is distributed proportionately between you and your wife. In December you would each receive a full benefit amount for a total family benefit of $2,400 ($1,600 plus $800).
In this example what would happen if your spouse were working but you were not working? In this situation her benefits would be offset due to her work and earnings, but your retirement benefits would not be affected by her work. You would still receive your full benefits.
As noted above, most auxiliary benefits are offset based upon the work and earnings of the number holder. There is one situation in which this is not the case. Someone receiving divorced spouse’s benefits who has been divorced from the worker for at least two years is not affected by the work and earnings of the number holder. Congress is often more generous with benefits for divorced spouses than it is with benefits for married spouses. Thus, if your non-working divorced spouse has been divorced from you for two years or more, he/she may collect benefits on your record, even if you are precluded from getting benefits because of your own work and earnings.
Reporting Requirements
When you file for Social Security benefits, you should provide an estimate of your earnings for the current year if you are under full retirement age and still working. If your earnings change substantially thereafter and you are still under full retirement age, you should advise the Social Security Administration of this change.
A final decision on the amount of earnings used for the work test in any given year is not made until the tax year is over and the earnings are actually known. The Social Security Administration uses the W-2 provided by your employer and/or your self-employment tax return filed with the IRS to determine your final earnings for the year. The Administration processes the work test for all beneficiaries in the year following the year of work. Your benefits are adjusted based upon their records, and you are advised of their decision. You should notify the Administration if there are extenuating circumstances not reflected on your W-2 or self-employment tax return. Examples of extenuating circumstances might include payments for work performed in prior years; or you might eligible for payments based upon your grace year and you have not previously notified Social Security.
Reduction Factor Adjustments
There is an upside to the work test. If any benefits are withheld because of work, you will receive an increase in your benefit amount at full retirement age giving you credit for the previously withheld benefits. The Social Security Administration refers to this increase as an adjustment in reduction factor (ARF). Here’s how it works.
If you file for benefits prior to full retirement age, your basic or primary benefit amount is actuarially reduced for each month you are entitled to benefits prior to your full retirement age. This reduction for retirement benefits is 5/9 of 1% for each of the first 36 months that you accept benefits prior to full retirement age and 5/12 of 1% for each subsequent month. If you file for Social Security at age 62, you are starting benefits 48 months or 4 years prior to your full retirement age which is age 67. In this instance, your benefit amount will be reduced by 30% (5/9% x 36 months plus 5/12% x 24 months). If you start taking Social Security at age 64, your benefit amount will be reduced by 20% (5/9% x 36 months).
As we explained above, your work prior to full retirement age may cause an offset in benefits for one or more months during the year. You do not receive a check or perhaps you receive only a partial check for months that are offset. At full retirement age the reduction factor is removed for each month in which you did not receive your full benefit amount.
Example: Georgia files for benefits at age 64 in February 2023. Her primary benefit amount of $1,000 is reduced by 20% (5/9% x 36 months), providing her with a reduced benefit of $800. Georgia is still working and receives her full benefit amount ($800) for only 24 of the 36 months prior to her attainment of full retirement age. For the other 12 months she does not receive any monthly benefit or perhaps she receives only a partial monthly benefit on account of her work. At full retirement age her benefit amount is refigured to give her credit for these 12 months. Thus, in February 2026 (age 67) her retirement benefit amount is reduced by only 6.67% (5/9% x 12 months), providing her with a Social Security monthly benefit of $933. This benefit increase is effective with the month in which she reaches full retirement age. (Actually, her benefit rate at full retirement age will be probably be somewhat higher due to cost of living increases that occur each January.)7
Recomputations
Another upside to working is that your earnings may be used to increase your monthly benefit amount. Your primary or basic benefit amount is calculated using your 35 highest years of earnings. Generally, the more earnings you accumulate in these 35 highest years, the higher your benefit rate. It is a complex computation and beyond the scope of this discussion. Suffice it to say that if your earnings in the current year are higher than the earnings in one of the 35 years presently being used to calculate your benefit amount, the current year replaces the lowest year in the computation. This, in turn, increases your benefit amount in January of the following year. Not surprisingly, the Social Security Administration calls this re-computing of the benefit amount a recomputation.
Example: Jessica’s current primary benefit amount is $1,000. She continues to work while collecting part of her retirement benefits each year. In 2022 she earns $25,000. These earnings are higher than the earnings for one of the years currently being used to compute her monthly benefit amount. The earnings for 2022 replace the earnings for the lowest year currently being used to calculate her benefit amount. In January 2023 Jessica’s primary benefit amount is increased to include the earnings for 2022.8
Conclusion
This is a very brief overview of how work and earnings may affect your Social Security benefits. If you would like to know more about this topic, please feel free to contact us at Family Wealth Decisions Group. Remember, we are here to help.
Doug Lemons, CFP®
1For more information regarding full retirement age, see https://www.ssa.gov/benefits/retirement/planner/agereduction.html and https://www.ssa.gov/benefits/survivors/survivorchartred.html#:~:text=The%20earliest%20a%20widow%20or,retirement%20age%20as%20a%20survivor.
2https://www.ssa.gov/oact/cola/rtea.html
3https://www.ssa.gov/benefits/retirement/planner/whileworking.html
4https://www.ssa.gov/pubs/EN-05-10069.pdf
5Ibid. and https://www.ssa.gov/pubs/EN-05-10063.pdf
6https://www.ssa.gov/OP_Home/handbook/handbook.18/handbook-1807.html
7https://www.ssa.gov/policy/docs/program-explainers/retirement-earnings-test.html
8https://secure.ssa.gov/poms.nsf/lnx/0300605401
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