Social Security has announced a slate of changes for 2019 that everyone should be aware of. One of the most important changes to the program next year allows you to earn more money without triggering a reduction in your Social Security income. Read on to learn how much more money you can earn in 2019 without risking your Social Security.
Social Security's earnings test: How it works
You can begin drawing Social Security benefits as early as age 62, but if you do claim your benefits early, you'll receive less than if you claimed at your full retirement age, and you'll be exposed to the risk of a reduction in your benefits if your earnings exceed an annual limit.
Full retirement age varies, but for people born after 1954, it ranges between age 66 and 67. If you're turning 62 in 2019, your full retirement age is 66 years and six months. Begin receiving benefits earlier than that, and your benefit will be reduced by five-ninths of 1% per month (6 2/3% per year) for the first 36 months you claim early and five-twelfths of 1% per month (5% per year) for each month beyond 36 months. For instance, a person born in or after 1960 has a full retirement age of 67. If they claim at age 62, their Social Security income would be reduced by 30%.
In addition to the early-claim reduction, Social Security also has an earnings limit test for recipients who are less than full retirement age that can lower your benefit.
The earnings limit changes every year based on Social Security's inflation measure, the national average wage index. In 2018, you could earn up to $17,040 before triggering a reduction to your benefits, but in 2019, you'll be able to earn $17,640, or 3.5% more.
If your earnings exceed $17,640 in 2019 and you're under full retirement age for the entire year, then Social Security will reduce your Social Security income by $1 for every $2 earned above the limit.
If you turn full retirement age in 2019, then you can earn up to $46,920 in the months leading up to full retirement age. But if you earn more than that, then Social Security will reduce your benefit by $1 for every $3 earned above the limit.
|Annual Retirement Earnings Test Exempt Amounts|
|Year||Lower amount limit||Higher amount limit|
If your earnings are above these limits, the reduction won't apply proportionately to each monthly Social Security check. Instead, Social Security withholds monthly checks until the reduction amount is satisfied, rounding up one month because it doesn't pay partial monthly payments. Once the reduction is satisfied, you'll receive your normal monthly checks for the remainder of the year.
For example, let's say Jane is age 62, her Social Security benefit is $600 per month, and she expects to earn $25,000 in 2019, or $7,360 more than the allowed earnings limit. Social Security would hold back $3,680 ($1 for every $2 above the limit) by withholding payments to her through July. In August, Jane would begin receiving her normal $600-per-month check through the end of the year.
Reductions caused by the earnings test aren't lost
One common misconception is that reductions to Social Security income because of the earnings test are forfeited. That's not true.
As I mentioned, Social Security doesn't issue partial monthly benefit checks, and that can mean you overpay your earnings test reduction in any given year. When that happens, Social Security will pay you back the amount you overpaid in the following year.
For instance, in my prior example, Jane wouldn't receive seven months of her monthly Social Security checks, or $4,200, which is $520 more than her $3,680 her Social Security earnings test reduction amount. In 2020, she'd receive a check for that $520.
Importantly, any reductions to your benefit caused by the annual earnings test are added back to your Social Security record. That means your earnings limit reduction will increase the amount you'll eventually receive in Social Security benefits at full retirement age.