You can collect Social Security benefits as early as age 62, and you're free to work after your benefits start. However, depending on your age and income, working after you file for Social Security can reduce your monthly checks. Here's what you need to know about the Social Security earnings tests, and what it means to you in the long run.
Three categories of Social Security recipients
For the purposes of determining how working affects Social Security benefits, there are three distinct categories of beneficiaries.
- Social Security recipients over 62 who will not reach full retirement age during the current calendar year.
- Social Security recipients who haven't reached full retirement age, but will during the year.
- Social Security recipients who are over full retirement age.
As you might imagine, these are listed in order from the most restrictive rules to least. In fact, Social Security recipients who are over full retirement age don't have to worry – they can work all they want without any benefit reductions whatsoever. The other two groups are subject to the Social Security earnings test to determine their benefit reduction, if any.
Full retirement age (also referred to as "normal retirement age") is 66 years old for workers born between 1943 and 1954 – so this includes people reaching full retirement age now. For those born after 1954, full retirement age increases by two months per year until it reaches 67 for those born in 1960 or later.
The Social Security earnings test
For Social Security recipients who will reach full retirement age after 2016, the first $15,720 in earnings are exempt. Above this amount, benefits will be reduced by $1 for every $2 in excess earnings.
As an example, let's say that you're 63, and you earn $30,000 this year. Under the earnings test, only $14,280 will be considered when determining your benefit reduction, and your annual Social Security benefit will be reduced by half of this amount, or $7,140.
For those who will reach full retirement age during 2016, the exempt amount is much higher-$41,880, and only earnings in the months prior to the month of your birthday will be considered. Above this amount, your benefits are reduced by $1 for every $3 in earnings.
Let's say that you currently collect Social Security, and that you'll reach full retirement age in August. We'll also say that you have a job with a $60,000 annual salary ($5,000 per month). Even though your salary is greater than the exempt amount, the earnings test only considers the first seven months of the year, since you'll attain full retirement age in August. This means that $35,000 are considered for benefit reduction purposes, which puts you below the threshold. Therefore, your Social Security benefit for 2016 will not be reduced.
Keep in mind that these thresholds apply for 2016. The exempt amounts are adjusted annually to keep up with the national average wage index, and will likely rise going forward. Also, there has been some talk among politicians about getting rid of the earnings test in order to encourage seniors to remain in the workforce until full retirement age.
It's not really a reduction
Finally, it's important to mention that this isn't really a "reduction" at all. Rather, your benefits are simply withheld. Once you reach your full retirement age, you'll receive credit for any benefit reduction, and your retirement benefits will be permanently increased from that time on.