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Monday, May 24, 2010

Social Security Retirement Earnings Test: How Earnings Affect Benefits

Dawn Nuschler
Specialist in Income Security

Alison M. Shelton
Analyst in Income Security

Under the Social Security Retirement Earnings Test (RET), the monthly benefit of a Social Security beneficiary who is below full retirement age (FRA) is reduced if he or she has earnings that exceed an annual threshold. In 2010, a beneficiary who is below FRA and will not attain FRA during the year is subject to a $1 reduction in benefits for each $2 of earnings above $14,160. A beneficiary who will attain FRA in 2010 is subject to a $1 reduction in benefits for each $3 of earnings above $37,680. The annual exempt amounts ($14,160 and $37,680 in 2010) generally are adjusted each year according to average wage growth. 

If a beneficiary is affected by the RET, his or her monthly benefit may be reduced in part or in full, depending on the total applicable reduction. For example, if the total applicable reduction is greater than the beneficiary's monthly benefit amount, no monthly benefit is payable for one or more months. If family members also receive auxiliary benefits based on the beneficiary's work record, the reduction is pro-rated and applied to all benefits payable on that work record (including benefits paid to spouses who are above FRA). For example, in the case of a family consisting of a worker beneficiary who has earnings above the annual exempt amount and a spouse and child who receive benefits based on his or her work record, the benefit reduction that applies under the RET is charged against the total family benefit. 

The RET has been part of the Social Security program in some form throughout the program's history. The original rationale for the RET was that, as a social insurance system, Social Security protects workers from certain risks, including the loss of earnings due to retirement. Therefore, benefits should be withheld from workers who show by their earnings that they have not "retired." The RET does not apply to Social Security disability beneficiaries who are subject to separate limitations on earnings. 

If a beneficiary is affected by the RET, his or her monthly benefit is recomputed, and the dollar amount of the monthly benefit is increased, when he or she attains FRA. This feature of the RET, which allows beneficiaries to recoup benefits "lost" as a result of the RET, is not widely known or understood. The benefit recomputation at FRA is done by adjusting (lessening) the actuarial reduction for retirement before FRA that was applied in the initial benefit computation to take into account months for which benefits were reduced in part or in full under the RET. Any spousal benefits that were reduced because of the RET are recomputed when the spouse attains FRA. For a spouse who has already attained FRA, however, there is no subsequent adjustment to benefits to take into account months for which no benefit or a partial benefit was paid as a result of the RET. 

The Social Security Administration estimates that elimination of the RET for individuals aged 62 or older would have a negative effect on the Social Security trust fund in the amount of $81 billion from 2012 to 2018, although it would have no major effect on Social Security's projected long-range financial outlook. 

This report explains how the RET works under current law. In addition, it provides benefit examples to illustrate the effect of the RET on Social Security beneficiaries who are below FRA and family members who receive benefits based on their work records. It also briefly discusses policy issues, including recent research on the effect of the RET on work effort and the decision to claim Social Security benefits.

Date of Report: May 17, 2010
Number of Pages: 29
Order Number: R41242
Price: $29.95

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