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The decision of when to begin taking Social Security benefits is one of the most important questions that many retirees face. Thanks to the maze of rules that individuals and couples must navigate, however, it is also one of the most frustratingly complex.

And while many retirees are aware that claiming Social Security benefits early can lead to a reduced benefit, research has shown that fewer individuals understand the earnings test rules that can also impact benefits when a pre-full retirement age worker decides to claim benefits while also still working.

Thankfully though, benefits lost to the earnings test aren’t generally lost forever. Instead, when an individual reaches full retirement age, the Social Security Administration will recalculate the individual’s earnings test reduced benefit, reducing the actuarial reduction for claiming early by the number of months in which no benefits were received.

There are, however, some situations in which benefits withheld by the earnings test truly are lost forever. Understanding how to guide clients through these often fraught and confusing moments is yet one more way advisors can add value, and help their clients stick to their plans.

The Social Security rules are extraordinarily complex, a virtual labyrinth that retirees must navigate to get the most out of the system they have likely been paying into for most of their lives. The timing of when benefits are claimed can have a significant impact, not only because benefits are adjusted — i.e., reduced — for those who retire early, but also because the so-called Social Security earnings test applies to anyone who receives benefits early.

Unfortunately, the complexities that arise when retiring early begin with defining what constitutes early in the first place. Claiming early can be defined as claiming prior to one’s full retirement age, which itself may be age 66, 67 or some number of months in between, depending on the individual’s birth year.

Notwithstanding the variability of what constitutes early, the essence of the earnings test is very simple: When individuals who start receiving their Social Security benefits early end out earning too much, their Social Security benefits are reduced, potentially all the way to $0.

When calculating the impact of the Social Security earnings limit for those who claim benefits before full retirement age, it is important to distinguish between the calendar year in which an individual attains full retirement age and years prior to reaching that landmark. This is due to the fact that the earnings limit test uses both a different limit and a different formula in the year a person reaches full retirement age, as compared to earlier years.

If an individual is below full retirement age for the entire year — e.g., just 62, 63, 64 or 65 this year — the earnings limit begins to impact benefits once earnings exceed $17,640 for 2019. After total earnings exceed this threshold amount, the Social Security Administration will withhold, i.e., reduce, $1 of benefits for every $2 of earnings above that limit. Notably though, the $1 of benefits withheld for every $2 of earnings over the limit applies to a Social Security recipient’s total annual benefit, not the monthly benefit.

Example No. 1: Charles begins receiving his Social Security retirement benefit in 2018 at age 64. For 2019 Charles anticipates receiving $1,000 of benefits per month, or $12,000 in total annual benefits.

However, Charles decides to continue working part-time, and throughout the course of 2019 he earns $22,140. As a result, the total amount of Social Security benefits Charles receives in 2019 will be reduced due to the earnings limit.

Since Charles’ earned income is $22,140 – $17,640 = $4,500 more than the 2019 threshold amount, he will have $4,500 / 2 = $2,250 of his 2019 annual benefits withheld by the Social Security Administration. Thus, instead of the $12,000 of total annual benefits to which he would otherwise be entitled, Charles will receive $9,750 of Social Security benefits in 2019 —though technically, due to the way Social Security withholds benefits under the earnings test as explored in greater detail below, Charles would actually receive only $9,000 of Social Security benefits in 2019, and would then receive an additional $750 in early 2020 for 2019.

Given the importance of cash flow in planning, it’s also important to understand just how the Social Security Administration withholds benefits pursuant to the earnings test. The natural inclination of many is to think that benefits are withheld proportionately from each Social Security check throughout the year, but that is not the way the benefit reductions are applied.

Instead, the Social Security Administration asks individuals to estimate their income for the year and then bases the amount of benefits withheld on those estimates. To avoid under-withholding benefits that would eventually have to be repaid, potentially causing undue cash-flow hardships, Social Security Administration employees are supposed to encourage individuals to use conservative, i.e., high, earnings estimates unless they are reasonably certain of exactly what earnings will be.

Armed with an individual’s own earnings estimates — which can be updated by contacting the Social Security Administration — all applicable benefits for the year will be withheld before any benefits are paid.

Specifically, Program Operations Manual System (POMS) Section Chapter RS – Retirement and Survivors Insurance, Section 02501.095(B)(1) states:

“Charge an individual’s excess earnings to each monthly benefit beginning with the first month the individual is entitled in the year in question and continuing until the excess is recovered or until all the benefits have been withheld for the year. Do not charge the excess for one year into the next year.”

Thus, benefits are withheld starting at the beginning of each year, or immediately in the case of an individual applying for benefits during the year, and no Social Security benefits are paid until enough benefits have been withheld to allow a full month’s Social Security check to be paid.

Then, after the year has ended, the Social Security Administration will calculate the exact amount of benefits that should have been reduced, and will either pay any prior underpayment if over-withholding occurred, or let a beneficiary know that they were overpaid and require that the recipient repay their excess benefits.

Example No. 2: Recall Charles, who had anticipated receiving $12,000 of Social Security benefits in 2019, but due to the earnings test will only be entitled to $9,750 of benefits.

While Charles’ average monthly Social Security benefit for 2019 will be $9,750 / 12 = $812.50, he will not receive monthly checks in that amount. Instead Charles will not receive any Social Security benefits for 2019 until he can receive his full $1,000 monthly benefit amount. Thus, he will receive no benefits in January, February or March.

Beginning in April, he will receive his full $1,000 monthly benefit, which will continue to be paid monthly throughout the remainder of the year. In early 2020 the Social Security Administration would review Charles’s 2019 earnings, and would pay him the $750 partial month benefit he is owed for March 2019.

In the calendar year that a Social Security recipient reaches their full retirement age, the earnings test uses a separate threshold amount and formula to determine how much, if any, of an individual’s benefits should be withheld.

Specifically, a person reaching full retirement age at any time during the current year may earn up to a much higher $46,920 in 2019 before any Social Security benefits are withheld. Once earnings exceed that threshold, Social Security will withhold $1 of benefits for every $3 of earnings over the limit, instead of the $1-for-every-$2-over formula that applies to prior years.

Example No. 3a: Frankie is the office manager of a large law firm and has a $102,000 salary, paid in monthly installments of $8,500. She was born on July 2, 1953, and thus will reach her birth-year–specific full retirement age of 66 in July 2019. However, Frankie decides to begin collecting Social Security benefits in January 2019 which — prior to any impact of the earnings test — have been calculated to be $2,000 per month.

Frankie will earn a total 6 x $8,500 = $51,000 prior to the month in which she reaches her full retirement age, which is more than the $46,920 threshold amount for 2019, and therefore her pre-full retirement age Social Security benefits will be reduced.

Specifically, Frankie’s $51,000 of countable earnings are $4,080 more than her $46,920 threshold amount. Thus, under the $1-for-every-$3-over formula that applies to benefits received in the year an individual reaches their full retirement age, Frankie will have $1,360 of her benefits withheld by the Social Security Administration.

Thus, Frankie will have her January 2019 check in the amount of $2,000 withheld by Social Security because partial payments are not made. This more than covers the $1,360 earnings-limit-withheld benefits, and Frankie will begin receiving her monthly $2,000 checks in February 2019. In turn, in early 2020 she will receive a subsequent additional payment of $640 that was effectively over-withheld from the first check of 2019, since the reduction was only $1,360 but all $2,000 was withheld for that month.

The special earnings test rules that apply in the year a person attains full retirement age somewhat favor those with birthdays earlier in the year. That’s because not only does the earnings limit vanish once an individual reaches the month in which they attain their full retirement age — allowing someone to earn an unlimited amount of money without impacting their Social Security benefits — but also because the full retirement age higher limit amount is not prorated. Thus, regardless of when during the year a person reaches their full retirement age, they may earn $46,920 prior to that month without an impact to their benefits.

Example No. 3b: Grace works an attorney at the same large law firm as Frankie. Grace has a $360,000 salary, paid in monthly installments of $30,000. She was born on February 2, 1953, and thus will reach her birth-year–specific full retirement age of 66 in February 2019.

Grace decides she would like to begin receiving Social Security retirement benefits in January 2019 which, prior to any impact of the earnings test, have been calculated to be $2,500 per month.

Grace will earn a total of $30,000 in January 2019, the only month in which she will work prior to reaching her full retirement age. Since $30,000 is less than the $46,920 threshold amount for earnings in the year of — but prior to the month of — full retirement age, Grace will receive her full $2,500 Social Security benefit immediately in January 2019, and will continue to receive that benefit going forward after she reaches full retirement age as well.

One beneficial aspect of the earnings test is that once an individual retires, they may claim a Social Security benefit that is not reduced by any income earned earlier in the year. Thus, even if an individual has already made substantially more than their earnings test threshold amount, if they retire they can immediately begin receiving their full, unreduced Social Security benefits.

This benefit is applicable thanks to a special rule known as a grace year. This is the first year in which an individual is entitled to a Social Security benefit and earns less than the monthly limit in at least one month. This would normally be the year they retire, but individuals may also have a grace year after a break in entitlement as well as when certain benefits received within the year — such as a child’s benefit or mother’s/father’s benefit — terminate.

The monthly limit in a grace year is simply an individual’s applicable annual limit, divided by 12. So for 2019, the monthly limit for an individual below full retirement age for the full year is $17,640 / 12 = $1,470, while the monthly limit for an individual reaching full retirement age in 2019 is $46,920 / 12 = $3,910.

So only in an individual’s grace year are they entitled to a full monthly benefit, unreduced by the earnings test, for any month in which they did not earn more than the monthly limit.

Example No. 4: Fred is a successful advisor who is 64 years old. From the beginning of the year in January through April when he sold his practice, Fred earned $250,000 — exponentially more than his $17,640 threshold amount for 2019. However, under the special rules that apply in the grace year Fred can retire in April and apply for Social Security benefits effective May 2019, and can immediately begin receiving benefits.

Note that Fred is entitled to use the special grace year rules because this is the first year that he was entitled to his retirement benefit and because he earned less than the monthly limit in at least one month. Specifically, Fred’s benefits began after he actually retired, and thus his monthly earnings in each of those subsequent months he received benefits was zero.

Note that if Fred wanted to, he could have continued to earn up to $1,470 per month after claiming benefits, and still avoided any impact of the earnings test in that year because this amount would not exceed his monthly limit.

Determining when employment ends — and for purposes of the grace year rule, when income was actually earned — is fairly straightforward for W-2 employees. If Social Security benefits begin after W-2 employment ends — i.e., after the date on which they terminate employment, presuming they don’t take a new job with new W-2 wages to report — it’s quite clear that the W-2 income doesn’t overlap benefits and won’t apply against, and certainly won’t exceed, the monthly limit.

On the other hand, determining retirement for self-employed individuals is a bit trickier. Social Security generally looks to see if a self-employed person renders substantial services during a month, and if such services are provided, the individual is not retired and the earnings may still count toward the grace year’s monthly limit in that month.

Substantial service is typically defined as devoting more than 45 hours per month to the business, or devoting more than 15 hours per month to the business if it is a high-skill occupation. However, if a self-employed person can show that their monthly earnings are less than the $1,470 exempt monthly amount, they may be able to be considered retired as well and receive Social Security benefits that are not reduced by the earnings test — regardless of how many hours they’re spending to reach that income level. Note however that in the Social Security Administration’s own words, “This exception to the 45-hour rule has limited application since, in most SE, the monthly earnings are not readily determinable.”

As the name implies, the Social Security earnings test — technically referred to as the Annual earnings test, or AET, by the Social Security Administration itself — is only concerned with earned income. This income is generally comprised of an individual’s net earnings from self-employment, plus any gross W-2 wages — i.e., those not reduced by contributions to retirement accounts.

In limited circumstances however, an individual may be able to exclude net earnings from self-employment and/or certain W-2 wages from being counted as earned income for purposes of the earnings test. Self-employment income, for instance, can be excluded from the earnings test if an individual can prove that the income results from services performed before Social Security benefits were claimed — even if the income is received later.

Example No. 5: Caryn is a 64-year-old sole-proprietor CPA who decided to call it quits after filing the last of her clients’ tax returns in October 2018. The following month, Caryn claimed Social Security benefits and, thanks to the special year-of-retirement grace year rule, she immediately began receiving a monthly benefit of $1,800 since her earnings were $0 in the months when her benefits began.

However, some of Caryn’s clients took their time paying their invoices. As a result, Caryn received $30,000 of payments for her 2018 tax services in early 2019. Being a cash basis taxpayer, Caryn will report this income for 2019, even though it was for services rendered in 2018.

Suppose that after factoring in a small amount of continued expenses, Caryn’s net profit from self-employment for 2019 is $27,460. Although that amount is $10,000 more than her $17,640 earnings limit for 2019, Social Security will not be required to withhold any of her benefits. That’s because even though Caryn will show a profit for tax purposes in 2019, the profit is really due to services performed in 2018 — prior to when Caryn claimed benefits — and consequently she should not be subject to the earnings test.

An exception for W-2 wages works in a substantially similar way. If wages are received after retirement for work performed before retirement — e.g., post-employment severance payments — the wages do not count for purposes of the earnings test. As specified by POMS Section Chapter RS – Retirement and Survivors Insurance, Section 02505.045(A), wages received “on account of retirement,” termination pay, accrued sick leave or vacation pay and bonuses attributable to work performed in an earlier year should not reduce an early retiree’s Social Security benefits.

Of course there’s no way for the Social Security Administration to know why wages were received, so in most cases a beneficiary must tell them. With respect to explaining the nature of earnings — and trying to exempt them from the earnings test — an individual should file Form SSA-795 (Statement of Claimant or Other Person) and include information such as the amount of wages that should be excluded from the earnings test calculation and the reason such amounts should be excluded.

Notably though, it’s specifically earned income that creates issues under the earnings test. A taxpayer can enjoy an infinite amount of income and enjoy a Social Security benefit that is not reduced by the earnings test as long as the other, non-Social Security income doesn’t consist of earnings from employment — at least, not greater than the individual’s earnings threshold for the year.

For instance, an individual may receive a pension of any amount, or take distributions from a retirement account of any size, without fear of reducing their Social Security benefits. Similarly, investment income such as interest, dividends and capital gains has no impact on the earnings test.

One of the challenges of Social Security planning is that the benefits are not of a singular, uniform type. Rather, the Social Security Administration is responsible for administering a number of discrete benefits, each with its own set of similar — but not equal — rules. Such benefits include an individual’s own retirement benefit, a survivor’s benefit and so-called auxiliary benefits, such as a spousal benefit and a child of a retired worker benefit.

Each of these benefits is impacted by the earnings test in its own way.

When it comes to an individual’s own Social Security retirement benefit, i.e., the one earned via their own work history, only that individual’s earnings will impact that individual’s retirement benefit. Thus, a pre-full-retirement-age individual can receive a Social Security benefit that is not reduced by the earnings test, regardless of how much or little their spouse still earns. A spouse’s age would also be irrelevant in determining the impact of the earnings test on their own retirement benefit.

Example No. 6: Ben has recently retired at age 64. Ben’s wife, Shannon, is a senior executive at a large firm and earns $1 million per year. Despite Shannon’s high earnings, Ben may claim Social Security benefits without running afoul of the earnings test.

Widowed individuals are eligible for Social Security survivor benefits based on the deceased spouse’s earnings history, provided they were married to the decedent for at least nine months prior to their passing, or less than nine months in certain instances.

Individuals usually have a substantial amount of flexibility when it comes to survivor benefit planning. Unlike the deemed filing that occurs when a person applies for either their own benefit or their spousal benefit, which automatically applies them for the other benefit as well — an exception to which is still available on or after full retirement age for those who will turn 66 on or before January 1, 2020 — an individual can apply for only their own individual retirement benefit first, and later apply for and switch to their higher survivor benefit, or they can claim only their survivor benefit first and later switch to their own, higher retirement benefit.

Despite the flexibility of benefit selection for surviving spouses though, they receive no such benefit when it comes to the earnings test. Instead, the test will reduce a survivor benefit in the same way it would reduce an individual’s own retirement benefit. Thus, regardless of which benefit a pre-full-retirement-age survivor chooses to collect, any earnings above their applicable threshold amount for the year will reduce the amount of Social Security income that they receive if the benefits are received before full retirement age.

In addition to being entitled to a benefit based on an individual’s own work history, or that of their spouse after the spouse’s death — i.e., a survivors benefit, discussed further below — sometimes a person is entitled to a benefit based on another worker’s earnings history while that worker is alive. These benefits, called auxiliary benefits, are also subject to the earnings test.

Suppose Vance, who has worked for nearly 40 years, has recently begun to collect Social Security benefits based on his work record. Pam, Vance’s wife, never worked but has applied for Social Security spousal benefits. Meanwhile, Vance and Pam have a 14-year-old son, Jim, who is receiving child benefits, also based on Vance’s work record. In this situation, both Pam and Jim’s benefits are auxiliary benefits because they are received based on Vance’s earnings record.

Unfortunately, the earnings test for auxiliary benefits can actually be even more problematic than its application to other — e.g., retirement or survivor — benefits. That’s because when it comes to auxiliary benefits, the earnings from both spouses, or really either spouse, can impact the benefit amount.

Example No. 6a: Harry is closing in on 64 years and his wife, Sally, is 67. Harry is still working and has filed for his Social Security retirement benefit, and Sally, who chose to dedicate her life to volunteerism, has filed for her spousal benefit. Prior to the impact of the earnings test, Harry’s own benefit is $1,700/month, while Sally’s spousal benefit would be $1,000 — that is, 50% of Harry’s full $2,000/month primary Insurance amount, as while Harry’s benefit is reduced to $1,700 by retiring early, Sally’s spousal benefit remains the full auxiliary benefit because she is full retirement age.

Initially, Harry had planned to retire at the end of 2018, but his employer offered him a part-time position that Harry couldn’t pass up, and he decided to continue working in 2019. Harry’s salary in 2019 is $37,640, which is $20,000 more than his threshold amount of $17,640 for the year, and as a result $10,000 of benefits based on his earnings record must be withheld. More importantly, because Sally’s benefit is based on Harry’s earnings record it means that when the earnings test reduces Harry’s benefits, it reduces Sally’s benefits as well.

In this case, the combined amount that Harry and Sally are supposed to receive, prior to the impact of the Earning Test, is $1,000 + $1,700 = $2,700/month. Thus, since Social Security will not pay any benefits for any portion of a month where there is a reduction in benefits due to the earnings test, Harry and Sally would receive no benefits for $10,000 / $3,700 = 3.704 (rounded up to four months) between January and April 2019, but would begin receiving Harry’s $1,700 retirement benefit and Sally’s $1,000 spousal benefit beginning in May 2019, and would continue to receive those benefits through the end of the year.

Note that even though Sally has reached full retirement age, because her Social Security benefit is entirely attributable to Harry’s work record her spousal benefit is reduced alongside his own retirement benefit.

However, while the earnings test may reduce both a worker’s own retirement benefit and any auxiliary benefits paid based on his/her earnings record, the spouse’s own benefits are not reduced in situations where he/she is also eligible for their own benefits as well.

Example No. 6b: Jake is 68 years old and his wife, Melanie, is 64. Both have filed for Social Security benefits.

Jake was a modest earner throughout his career. Melanie, on the other hand, was a high earner for many years, and has only recently begun to slow down, currently earning $31,640 per year. Prior to the impact of the earnings test, Jake is entitled to a $1,000 monthly retirement benefit on his own earnings record, and an additional $400 monthly spousal benefit — a total of $1,400/month — while Melanie is entitled to a $2,400 monthly retirement benefit.

In this scenario, Jake’s own retirement benefit of $1,000 would not be impacted by the earnings test because that benefit amount is attributable to his own earnings record. However, both the $400 monthly spousal benefit to which he is entitled, as well as Melanie’s $2,400 monthly retirement benefit, would be impacted by her earnings since she is under full retirement age.

Melanie’s $31,640 is $14,000 more than her $17,640 threshold amount for 2019 and thus, Social Security must withhold $14,000 / 2 = $7,000 of benefits. In this situation, there are a total of $2,800 of benefits being paid that are attributable to Melanie’s earnings history and thus, neither her own retirement benefit nor the $400 spousal benefit for Jake will be paid for the first $7,000 / 3 = 2.92 (rounded up to) three months of the year.

Therefore, from January through March, Jake would receive his monthly $1,000 retirement benefit — but only $1,000/month and not his total $1,400/month — while Melanie would receive no benefits at all. And from April through December, Jake would receive a $1,400 per month — his $1,000 retirement benefit plus his $400 spousal benefit — while Melanie would receive $2,400 monthly retirement benefit.

On the other hand, when the ages are reversed and the primary earner — on whose earnings record the auxiliary benefits are being paid — is past full retirement age, where the earnings test no longer applies, even otherwise unreduced auxiliary benefits can still be reduced because the actual spousal recipient fails the earnings test themselves.

Example No. 6c: Jerry is 68 years old and his wife, Dorothy, is 64.

Jerry was a high earner throughout his career and is currently enjoying a monthly Social Security benefit of $3,000 in addition to a $15,000 monthly salary. Similarly, Dorothy has also filed for Social Security benefits, while she is continuing to earn a $2,000 monthly salary, and is entitled to a combined $1,100 monthly benefit consisting of a $400 retirement benefit plus a $700 spousal benefit — that is, prior to feeling the impact of the earnings test.

Since Jerry has reached his full retirement age, his earnings have no impact on either his own benefit nor any benefit received by Dorothy. On the other hand, Dorothy is under full retirement age and must therefore apply the earnings test to her benefits. And since Dorothy’s annual salary is $24,000 — exceeding her earnings limit threshold of $17,640 by $6,360 — the Social Security Administration must withhold $6,360 / 2 = $3,180 in benefits.

The end result is that Dorothy’s total monthly benefit of $1,100 will therefore be withheld for three months, even though Jerry’s benefits will not be impacted at all.

When it comes to Social Security planning, reaching full retirement age tends to solve a lot of issues. At that point the earnings test no longer applies, regardless of one’s earnings from employment.

However, the challenge for couples in particular is that often one spouse retires while the other continues to work. This leads to a desire to begin claiming and maximizing Social Security benefits — in part to replace the one spouse’s lost wages — but can begin to run afoul of the earnings test, depending on whether the older or younger spouse is the one to retire while the other continues working.

In practice, if the spouse who continues working is over full retirement age, then all of the retirement and spousal benefits potentially available to the couple will be unimpacted by the earnings test — either due to the attainment of full retirement age for the working spouse or the lack of any earnings for the already-retired spouse.

Conversely, if the working spouse is under full retirement age, then that working spouse’s earnings will not only potentially impact their own retirement benefit, but also a spousal benefit claimed by either spouse. Thus, when a working spouse is under full retirement age but the couple is looking for additional cash flow via Social Security benefits, the only option at their disposal may be the nonworking spouse’s own individual retirement benefit, based on their own prior earnings.

Kitces impact of the earnings test IAG

While feeling the effects of the earnings test is often framed as a loss of benefits, it’s crucial to recognize that in reality, such benefits are not necessarily lost. That’s because they are actually added back to a beneficiary’s subsequent benefits upon attaining full retirement age.

However, any amounts that were previously withheld are not returned in a lump sum. Rather, for every one month that benefits are not received early on account of the earnings test, one month’s penalty for claiming Social Security benefits early will be reversed once full retirement age is reached.

Example No. 8: Carol is a waitress who will turn 66 and reach her full retirement age in September 2019. In 2015, upon reaching 62, Carol immediately applied for Social Security benefits based on her $1,000 Primary Insurance Amount (PIA). However, due to her early claiming of benefits at 62, she was only entitled to receive 75% of her PIA, or a $750 monthly benefit, prior to the application of the earnings test.

Suppose however that due to the earnings test, Carol received no Social Security benefits for two months in 2015, three months in 2016 and 2017, and four months in 2018. Thus, at the time she reaches full retirement age Carol will have lost out on a total of 12 months of Social Security benefits due to the earnings test, or a total of $9,000 — ignoring the impact of any cost of living adjustments.

To return these benefits to Carol at full retirement age, Social Security will wave its magic wand and — instead of treating Carol as though she claimed benefits at 62, when she actually claimed benefits for a 25% reduction — she will be treated as having claimed benefits 12 months later (i.e., the number of months that benefits were withheld due to the earnings test) at age 63, which would have been only a 20% reduction for early benefits.

Since the difference in the actuarial reduction for claiming Social Security benefits at 63 as opposed to 62 is 5%, the original reduction in Carol’s monthly benefit will be reduced by 5% — from a 25% reduction of her PIA to only a 20% reduction instead — once she reaches her full retirement age. Thus, Carol’s $1,000-reduced-to-$750 monthly benefit will become an $800 monthly benefit instead.

Because of the way in which Social Security returns benefits that were lost due to the earnings test, the ultimate harm — or potential benefit— caused by the rule depends on how long an individual lives after reaching full retirement age.

For instance, if Carol were to die on her 66th birthday, she will have truly lost the $9,000 of cumulative benefits that were withheld by Social Security as a result of the earnings test. If, however, Carol lived to be 91, she will have enjoyed 25 years x 12 months x $50 = $15,000 worth of additional Social Security benefits, ignoring the impact of any COLA. This mean the earnings test would have actually helped Carol in the long run, since she only lost $9,000 as a young retiree due to the earnings test — just as delaying Social Security helps anyone who lives past their life expectancy.

And while it’s true that there are time-value-of-money factors to consider, such factors are at least partially satisfied by the fact that any cost-of-living adjustments received after the adjustment at full retirement age will be made to a higher benefit amount.

In essence then, the Social Security earnings test is really nothing more than a forced delay of retirement, compelling someone claiming benefits early to wait until full retirement age after all — and receive the benefit they would have otherwise gotten had they not retired early. And this ironically may turn out to their benefit if they live long enough, as it would have been for anyone who delays Social Security and lives a long time.

Conversely though, it also means that a retiree who does not live long enough after reaching full retirement age to recoup previously withheld benefits really does finish at a financial loss, just as they would have by voluntarily delaying and then not living long enough to recoup the cost of delay.

The increase in benefits at full retirement age also only applies to the benefit that was reduced by the earnings test. For instance, if an individual receives a benefit that is not impacted by the earnings test — i.e., a divorced-spouse benefit for wages of an ex-spouse who was entitled to benefits prior to the month of divorce — there is no adjustment at full retirement age because there was no reduction of that benefit in the first place.

If on the other hand a surviving spouse retires early and is subject to the earnings test on her own retirement benefit, but later switches over to her deceased spouse’s higher benefit at full retirement age, there will not be an adjustment to the survivor’s benefit because it’s not the benefit that was withheld due to the earnings test. Consequently, any of the widow’s own retirement benefits reduced/withheld from 62 through full retirement age will have truly been lost.

And if a post-full-retirement-age spouse has benefits withheld because of a younger spouse’s earnings, then the older, non-working spouse will generally never get those benefits back. Since they have already reached full retirement age, they have already passed the point at which an adjustment would be made, and thus benefits that are lost are gone for good.

The key point is simply to acknowledge that, because of the impact of the earnings test — and especially the potential impact to expected cash flow it can cause — it’s especially important for married couples to manage the potential implications of the earnings test if one spouse retires early. Helping couples navigate this complex and often misunderstood process is yet another way for planners to add value, and for clients to enter retirement with confidence.

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