You'd be hard-pressed to find many people living in the U.S. who aren't familiar with Social Security. The federal program has been around for nearly 90 years and provides benefits to around 1 in 5 Americans, with more added to the list each year.
However, there are more individuals than you might realize who lack a full understanding of how Social Security works. Here are two important Social Security rules that millions of Americans who aren't retired yet don't know about.
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1. Working after claiming Social Security early could reduce benefits
A report published in December 2023 by the Social Security Advisory Board highlighted the American public's lack of understanding of the retirement earnings test. This test applies to individuals who collect Social Security retirement benefits before reaching their full retirement age (FRA). The report noted that several studies have found between 25% and 50% of Americans who haven't retired yet aren't aware that working after claiming Social Security early could reduce their benefits.
If you receive Social Security retirement benefits before your FRA, they will be reduced by $1 for every $2 you make above an annual limit if you're under your FRA for the entire year. In 2024, that annual limit is $22,320.
The rules change somewhat during the year in which you reach your FRA. In that case, your retirement benefits will be reduced by $1 for every $3 you earn above a higher annual limit. This higher threshold is $59,520 in 2024.
2. This reduction is only temporary
Although millions of Americans who aren't retired yet don't know about the retirement earnings test, at least half of them do. However, many of these more informed individuals still lack knowledge about a key provision of this rule. The Social Security Advisory Board report revealed that only 30% to 40% of those who know that benefits can be reduced while working understand that this reduction is only temporary.
One issue is that many financial advisors don't tell their clients about the temporary nature of this reduction. The Social Security Advisory Board's report stated that many of these financial advisors describe the retirement earnings test "as a tax and fail to explain to clients that the monthly benefits reduced due to work will later trigger a higher monthly benefit at FRA."
The Social Security Administration (SSA), however, explains how the process works in its official publications. For example, in its online information about receiving benefits while working, the agency clearly states that beginning in the month you reach FRA, your benefits will no longer be reduced no matter how much money you make. It also notes that your benefit amount will be recalculated to provide a credit for any amount previously withheld.
It's even possible that your benefits could be higher as a result of working. If your earnings while collecting Social Security before your FRA are one of your highest 35 earnings years, the SSA will automatically recalculate your benefit to use the higher earnings.
These Social Security rules affect a lot of people
The Social Security Advisory Board report cited a study that found nearly 50% of retirees born between 1931 and 1941 either partially retired or moved in and out of the workforce before fully retiring. It also referenced another study that showed a majority of individuals born between 1942 and 1947 "followed a gradual transition into full retirement."
It seems likely that these trends will apply to subsequent generations of retirees, too. The reasons that many people continue to work or go back to work -- including the need to supplement retirement income and a lack of fulfillment with full retirement -- won't go away.
