Social Security earnings test could reduce benefits for working retirees

If you receive Social Security retirement benefits and are still working, your monthly payments may be reduced depending on your situation.

But all that could change if the proposed Older Workers Freedom to Work Act becomes law.

A bicameral bill recently proposed by Sen. Rick Scott (R-Fla.) and Rep. Greg Murphy (R-Fla.) would eliminate a provision known as the retirement income test. This reduces Social Security benefits for individuals who begin collecting retirement benefits early and continue working.

The retirement income test affects people who claim Social Security before they reach full retirement age, when the beneficiary is eligible to receive 100% of the retirement benefits earned. Depending on the year of birth, this is usually between 66 and 67 years old.

In 2026, individuals who have not reached full retirement age can earn up to $24,480 in a year before the retirement income test is applied. If your income exceeds that annual limit, the Social Security Administration will deduct $1 from your benefits for every $2 you earn.

Individuals who reach full retirement age in 2026 will have a higher income limit of $65,160. If you earn more than that threshold, the Social Security Administration will deduct your benefit by $1 for every $3 you earn in the month before your birthday.

Once a beneficiary reaches full retirement age, benefits are no longer reduced based on income.

According to the Social Security Administration, beneficiaries who are particularly affected by the retirement income test will have their benefits recalculated once they reach full retirement age and will be deducted for the months in which their benefits were reduced or withheld.

“This bill would eliminate unfair retirement checks and ensure that seniors who want to stay in the workforce can do so without being penalized or stripped of their hard-earned benefits,” Scott said during a March 25 hearing of the Senate Committee on Aging.

It remains to be seen whether the Republican-led bill to eliminate retirement benefits reviews will gain traction on Capitol Hill.

Scott introduced the bill to the Senate on March 24 and referred it to the Senate Finance Committee. Mr. Murphy introduced this companion measure in the House on April 16 and referred it to the Ways and Means Committee.

Scott said in his testimony that the proposal to eliminate the retirement benefit check comes as workers over 55 are the fastest growing age group in the workforce.

Testifying at a Senate Committee on Aging hearing, Johnny C. Taylor Jr., president and CEO of the Society for Human Resources Management, told CNBC.com that the Society for Human Resource Management (SHRM) is “very strongly advocating” for a review of the retirement benefit test provisions.

“For people who are making a lot of money, it doesn’t matter,” Taylor said. “But if you’re in the lower-middle income bracket, losing money at that moment means you can’t afford to pay for medicine or food, so it becomes a disincentive to[work]and you stop completely.”

Social Security retirees already face the consequences of claiming benefits early. If you start collecting benefits at age 62, the earliest age to apply for retirement, you could expect to see a reduction of up to 30%, according to the Social Security Administration.

By waiting to claim until full retirement age, beneficiaries can receive 100% of the benefits they are entitled to. However, for every time a beneficiary delays from full retirement age to age 70, benefits can increase by 8%.

Rachel Gressler, a senior fellow at the Plymouth Free Enterprise Institute, said in testimony at a Senate Committee on Aging hearing that the retirement benefit test, created in 1935, is a “relic of the Great Depression” when policymakers tried to push older Americans out of the workforce and give jobs to younger workers.

The retirement benefit test is “little known and often misunderstood,” Gressler said.

“The lost benefits are gradually added to the recipient’s monthly check after they reach full retirement age, but most people don’t know that and perceive this test as a pure tax, after which they earn less or stop working altogether,” Gressler said.

People with shorter life expectancies may not be able to recover all or some of their lost benefits, she said.

Gressler said conducting retirement benefit checks costs the Social Security Administration $70 million a year and can result in unfair payments that require beneficiaries to return some of their benefit income to the Social Security Administration if they are overpaid.

A law signed by President Bill Clinton in 2000 no longer applies the retirement benefit test to workers who have reached full retirement age.

In testimony before the Senate Committee on Aging, Dan Adcock, director of government relations and policy for the National Committee to Preserve Social Security and Medicare, said many seniors who were not covered by the 2000 law complained that they were left behind.

“I know from attending town halls with seniors that repealing (the retirement income test) would be very popular,” Adcock said.

But before making those changes, he said, lawmakers should consider the impact on seniors and the solvency of the Social Security trust fund, which is expected to be depleted within 10 years.

Social Security Administration actuaries have found that eliminating the retirement income test will ultimately reduce trust fund costs, Adcock said. But in the short term, he said, repealing this provision could impact the program’s funding because it would require higher benefit payments and the trust fund’s total reserves are expected to be depleted in 2034.

For now, Social Security recipients who have not yet reached full retirement age need to consider how the retirement income test will affect their income.

Mark Stankato, a certified financial planner and registered agent and founder of VIP Wealth Advisors in Decatur, Georgia, said that when clients hear about benefit cuts, they often think they should quit their jobs or turn down opportunities.

“Many people don’t realize they may be eligible for this reduced benefit right now, but it will come back to them at some point,” Stancato said. “It’s not a permanent penalty.”

He said other factors also need to be considered, such as how important it is to keep a job relative to one’s personal goals.

People who want to keep their jobs should also consider when is the best time to claim Social Security benefits, depending on their own circumstances. Stancato said if you decide to file, you should consider how the additional income from your job will affect the taxes on your Social Security benefits.

To find out how the retirement benefit test will affect you, the Social Security Administration has a calculator on its website.