Social Security's Earnings Test: How Much Money Can You Make?

If you're thinking of working and collecting Social Security, you're not alone. Increasingly, people are considering retirement strategies that include claiming benefits as early as age 62 and working at least part-time. There are good reasons for embracing this approach, but there are trade-offs associated with this strategy to consider, too. For instance, Social Security's earnings test limits how much money you can make while collecting Social Security, and if you fail this test, your Social Security benefits could fall shy of your expectations.

Social Security's earnings limit

To understand Social Security's earnings rule, it helps to understand Social Security's claiming options.

Image source: Getty Images.

You can claim benefits as early as age 62, but you only get 100% of your Social Security benefit if you retire at your full retirement age, which varies between age 66 and age 67 (depending on your birth year) for people born after 1954. 

Retire sooner than full retirement age, and Social Security reduces your monthly benefit; retire later than full retirement age, and you'll receive an 8% increase to your benefit for every year you wait, up to age 70.

If you go the "claim early" route, the amount that Social Security reduces your payment by depends on the exact number of months prior to full retirement age you claim your benefits. For example, if you were born in 1960 or later, your full retirement age is 67, and if you claim benefits at age 62, you'll get 30% less than you'd get at age 67.

Nevertheless, the allure of pocketing (or investing!) Social Security early is tough to pass up, particularly if you plan to continue working. Claiming early can provide extra money for vacations (or help fund an IRA), but it's not without its pitfalls -- the biggest of which is Social Security's earnings test.

Social Security's earnings test applies to people who are younger than full retirement age, and if you fail it, you're benefits will be reduced.

Specifically, if you earn more money than what's allowed every year, and you're between age 62 and the year prior to your reaching full retirement age, then Social Security will hold back $1 for every $2 you earn above the limit. In the year you reach full retirement age, Social Security will hold back $1 for every $3 you earn over a higher limit, too.

The earnings limit changes every year based on changes to Social Security's average wage index. The following table shows you the limits for 2018. The lower amount limit applies from age 62 to the year prior to someone's reaching full retirement age, and the higher amount limit applies to the year in which someone reaches full retirement age.

The higher amount limit only applies to earnings in the months prior to the month someone reaches full retirement age, though. Any earnings in the month you reach full retirement age or after don't count toward the earnings test.

Data source: Social Security Administration.

One big reason to keep working

Perhaps, the single best reason to embrace a claim-early and keep-working strategy is to maximize your Social Security benefit.

Social Security only uses your highest 35 years of inflation-adjusted earnings when it calculates your benefit, so if your work record includes fewer than 35 years, the calculation will include zeros that can reduce your benefit. Similarly, if your work record includes over 35 years of work, the calculation may include more than one year when your inflation-adjusted earnings were lower than your earnings are now, which may also crimp your benefit.

Because Social Security recalculates your benefit in every year you have taxable earnings, working longer can replace zeros or low-income years in your work record and that can boost the size of your future payout.

What happens to my money?

One of the biggest Social Security myths is that money withheld by Social Security because of the earnings test is forfeited. It isn't. Instead, the monthly checks that are withheld are added back to your full retirement age benefit calculation. This increases the amount you'll receive in benefits once you reach full retirement age.

While it's a myth that Social Security's earnings test results in "lost" benefits, Social Security does become subject to Federal income taxes if your combined income is over $25,000 if filing single, or $32,000, if filing jointly. Therefore, you'll want to consider the risk to your tax bill before deciding to work while receiving Social Security.

One other thing to keep in mind is that Social Security's future is a bit uncertain because the program is collecting less in payroll taxes than it's paying out in benefits. Currently, the gap is being bridged by Social Security's trust fund, but that trust fund is expected to run out of money in 2034, causing an across the board 23% cut to benefits. It's likely Congress will make changes before then to shore up Social Security, but there's no guarantee those changes won't include changes to the earnings test that reduce your benefit if you claim early and continue to work.