Many people are unaware of the Social Security earned income limit, also known as the earnings test, which can impact their retirement benefits if they continue working while receiving Social Security benefits. The rule was established by Congress to discourage individuals from working while receiving Social Security benefits. However, the rule has been misunderstood by many, as it does not result in a permanent loss of benefits but rather a deferral of benefits that will be received later.
The earnings limit only applies until the year an individual reaches full retirement age (FRA). For those who are older than their FRA or do not plan to claim Social Security benefits before reaching their FRA, the earned income limit does not apply. However, for individuals who are younger than their FRA and continue to work while receiving Social Security benefits, their benefits will be reduced by $1 for every $2 earned above the limit, which was $22,320 in 2024.
The reduction in benefits is prorated based on the number of months worked and receiving benefits. For example, if someone is 64 years old and earns $23,320 in 2024, $1,000 above the earnings limit, they will lose $500 of their benefits for that year. The amount by which benefits are reduced is dependent on the individual’s age and income. Additionally, the earnings limit increases significantly in the year an individual reaches their FRA, with the 2024 limit set at $59,250.
Benefits are only reduced for the months of the year before an individual reaches their FRA if they exceed the earnings limit during that time. Any income earned after reaching the FRA does not impact benefits for that year. Earnings from jobs, self-employment, bonuses, commissions, and vacation pay count towards the earned income limit, while pensions, annuities, investment income, interest, and other non-earned income do not. The additional earnings are added to an individual’s lifetime earnings record, potentially increasing their future benefits.
While the calculations for determining the impact of working while receiving Social Security benefits may be complex, there are online tools and calculators available to help individuals understand the effects on their current and future benefits. Utilizing these calculators can provide insight into different scenarios and help individuals make informed decisions about their retirement benefits. Ultimately, exceeding the earned income limit is more of a deferral of benefits rather than a loss, as the amount forfeited will be added back to future benefits once an individual reaches their FRA.
