Continuing to work while receiving Social Security benefits may cause a reduction to your benefit – if you earn more than the annual earnings test (AET) amount. But this reduction isn’t permanent – you will get credit for reduced Social Security benefits when you reach Full Retirement Age. So how does this work?

Earnings Test

The earnings test limit is $17,040 for 2018 if you are under Full Retirement Age for the entire year. The limit is $45,360 in the year that you reach Full Retirement Age. Full Retirement Age (FRA) is age 66 if you were born between 1946 and 1954, ratcheting up to age 67 if your birth year is 1960 or later.

So for 2018 if you were born after 1952 and you are receiving Social Security benefits, for every two dollars that you earn over $17,040, one dollar of your benefit is withheld.

For example, if you earn $20,000 in 2018 and your Social Security benefit is $500 per month, that’s $2,960 more than the limit. Your $500 benefit will be withheld for the first 3 months, in order to withhold the full $1,480. The extra $20 will be refunded to you at the beginning of the next calendar year.

The same would happen if you will reach FRA in 2018 and you earn more than $45,360. Let’s say you make $50,000 during the first half of 2018 and you reach age 66 on July 1. Since you’ve earned $4,640 more than the limit before reaching FRA, $1 is withheld for every $3 over the limit. So if your SS benefit is $1,000, in order to withhold $1,547, 2 months’ worth of benefits will be withheld, and the over-withheld $453 will be paid out in January of the following year.

The Payback

Once you reach Full Retirement Age, you will receive credit for reduced Social Security benefits. SSA will look at your record to determine how many months’ worth of benefits that you have had withheld due to the earnings test. Your filing age is then re-calculated, adding on those months of withheld benefits.

Returning to our example from above, you were receiving a benefit of $500 per month beginning at age 62, and over the years 9 months’ worth of benefits had been withheld due to the earnings test. At FRA, your filing age is re-calculated as if you had filed at the age of 62 years, 9 months – an addition of 9 months.

Since your original benefit was reduced by 25%, your re-calculated benefit would only be reduced by 21.25% – owing to the fact that the year between age 62 and 63 increases your benefit by 5%. So your $500 benefit is increased to $525 per month from now forward.

Application

This reduction and payback applies to your own retirement benefit, spousal benefits, and survivor benefits. If your own benefit is withheld due to earnings over the limit, your beneficiaries’ benefits (your spouse’s or children’s benefits) will also be withheld until the reduction amount is completely covered. If you are receiving spousal benefits before FRA and are also working and earning more than the limit, only your spousal benefit is reduced due to those earnings.

For more trends in fixed income, visit the Advisor Solutions Channel.

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.