The Social Security Administration published its annual list of changes for 2017, which included a small cost-of-living adjustment and an increase in the taxable maximum earnings. In addition, the SSA announced that the "earnings test" limits are increasing significantly, which could mean higher benefits for Social Security recipients who are still working.
The 2017 Social Security earnings test
The Social Security earnings test essentially says that Social Security recipients who still work and have not yet reached full retirement age can have their benefits reduced if they earn more than a certain amount. For Social Security beneficiaries who will attain full retirement age after 2017, the exempt amount of earnings is $16,920, up by 7.6%, from $15,720 in 2016. This translates to $1,410 per month, and any $2 in earnings above the threshold will result in a $1 benefit reduction.
For Social Security beneficiaries who will attain full retirement age during 2017, the exempt amount is $44,880 for the year, or $3,740 per month, up 7.2% from $41,880 for the year in 2016. Earnings above this amount result in a $1 reduction for every $3, and this only applies in the months before full retirement age will be reached.
After reaching full retirement age (66 years old for people born in 1954 or earlier), there is no earnings test. In other words, Social Security beneficiaries over full retirement age can collect their full Social Security benefit, regardless of how much they earn.
What it means to your Social Security benefits
If you're currently collecting Social Security benefits and are working and under age 66, this could certainly have a big effect on you, especially if you're in the first group, and won't turn 66 until after 2017. In this case, if you earn more than $16,920 in 2017, which includes most full-time workers, the increase in the earnings test means that an additional $1,200 in earnings will be exempt from the earnings reduction formula. Since the earnings test for this age group reduces benefits at a two-to-one ratio for excess earnings, this could translate to an additional $600 on your Social Security checks for the year, or $50 per month.
If you're going to turn 66 in 2017 and earn more than $44,880 per year, an additional $250 of monthly earnings can be exempt from the earnings test. This could translate into $83 in additional monthly Social Security income during the months before your birthday.
Of course, if you earn enough money, it can wipe out your Social Security benefits completely, and the 2017 increase won't help you. As one example, if you're normal Social Security benefit is $1,200 per month, and you'll be under 66 throughout 2017, a $3,810 monthly income ($45,720 annually) from your job will result in your entire benefit being withheld.
One important thing to remember about the earnings test
Benefits withheld under the earnings test aren't exactly "lost." Reduced benefits before you attain retirement age can result in your future Social Security benefits being permanently increased to compensate. Of course, there's no guarantee that you'll live long enough for the increase to fully offset an earnings test reduction, so this is still very much a reduction as opposed to a simple withholding.
It's also worth mentioning that some politicians have floated the idea of getting rid of the earnings test altogether, claiming that it discourages older Americans from continuing to work full-time for as long as they want, and therefore results in lower tax revenue flowing into Social Security and the federal government. So it's entirely possible the earnings test won't exist forever, at least in its current form, depending on which political party is in power.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.