Social Security offers a valuable financial safety net to older Americans, with an emphasis on helping retirees replace the income they used to get from work. Yet there's no requirement to stop working before you collect Social Security, and increasingly, people have started claiming Social Security at the earliest possible opportunity even if they continue to stay in their jobs.
However, there is a catch to claiming Social Security while you're still working. The Social Security earnings test applies to those who haven't yet reached full retirement age and claim early retiree benefits while still working. Yet as one policymaker recently pointed out, the earnings test has some shortcomings of its own. That makes eliminating the earnings test worth considering -- even if such a move would have some related consequences.
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A new controversy about Social Security
Alicia Munnell heads the Center for Retirement Research at Boston College, and she recently wrote about the impact of Social Security's earnings test. As Munnell sees it, the best way to ensure that older Americans have the income they need is to take away any obstacles to their choosing to work as long as possible. The longer people stay in the workforce, the easier it is for them to sustain themselves financially once they do retire.
The earnings test takes away Social Security benefits under certain circumstances. Each year, new Social Security earnings limits come into effect that define the maximum that a person who's younger than full retirement age can earn before forfeiting a portion of his or her Social Security benefits. In particular, the following rules apply for 2019:
- If you're younger than full retirement age throughout 2019, then maximum earnings for 2019 are $17,640. Above that, you'll lose $1 in annual Social Security benefits for every additional $2 you earn. If you start taking benefits during 2019, then the monthly limit is $1,470 for the period of time you're receiving Social Security.
- Those who reach full retirement age during the year have higher limits and less onerous forfeiture provisions. For 2019, you'll lose $1 in annual benefits for every $3 you earn above the annual limit of $46,920. But once you reach full retirement age, any earnings after that date don't count toward the total.
- If you intend to retire in the middle of the year, another rule applies. Even if your earnings while you were still working were so high that they'd take away your benefits for the full year, you can still claim monthly checks for the months that you aren't working.
If that seems complicated, that's because it is. Munnell argues that many people don't understand the earnings test, and that acts to deter people from working while on Social Security -- and from claiming Social Security while they're still working.
So would getting rid of the earnings test be a good thing?
It's that last point that leaves Munnell in a dilemma. On one hand, if getting rid of the earnings test would keep more people working longer, it would be a net positive for the financial condition of older Americans. But if eliminating the earnings test leads more people to claim Social Security before they retire, then it would potentially lead more people to claim as early as possible.
Claiming early has an unrelated impact on financial security by reducing the size of benefit payments. That in turn affects how much surviving spouses receive after the death of a working spouse. Because surviving spouses are often in the most precarious financial condition among retirees, anything that cuts those payments could have a negative effect that outweighs any positives from longer workforce participation.
Nevertheless, there's past evidence that eliminating the earnings test could boost employment levels among older Americans. It used to be that the earnings test applied to all recipients, but in 2000, it was removed for those who had reached full retirement age. The impact of that move included a 3-percentage-point boost to labor force participation and a 15% rise in earnings.
The question of what to do with the Social Security earnings test is more complicated than it might seem at first glance. Yet if the top priority in trying to help older Americans be as financially stable as possible in their golden years, taking away any perceived impediment to work -- whether or not it's really intended to be an obstacle -- could be worth any related downsides.
Live the life you want
Deciding when to stop working can have an impact on your Social Security, but you shouldn't let potential reductions in benefits keep you from making the right life decision. By being aware of the multiple options you have to avoid losing your benefits, you'll be able to manage your career exactly the way you want.
