What You Should Know About the Social Security Earnings Test

For Americans ages 62 to 65, who fear seeing their Social Security benefits pared because of earnings, Andrew Biggs at the American Enterprise Institute has some good news about working in retirement:

Readers of financial columns know that the Social Security earnings test reduces benefits for retirees aged sixty-two to sixty-six who continue to work. Most seniors view the earnings test as a 50 percent tax on top of their income and payroll taxes, which discourages them from working and receiving benefits at the same time.

But the conventional wisdom regarding the Social Security earnings test is wrong. At the full retirement age (sixty-six for those born in 1943-54), Social Security increases benefits for individuals who had been subject to the earnings test, which completely offsets benefits lost earlier. Most seniors do not know this, since government agencies and financial advisers rarely tell them. Until very recently, SSA's own publications on the earnings test did not provide details on the benefit adjustment that takes place at the full retirement age. As a result, many retirees work less at the very time when continued work could benefit them most.