Social Security: Acing the Retirement Earnings Test

By Jonathan Peterson

Copyright © 2015 AARP. All rights reserved.

Earning money while collecting Social Security can make a lot of sense. But it can also mean a lower benefit in the short run, if you haven’t reached your full retirement age.

That’s because Social Security may withhold part of your benefit under the retirement earnings test.

The retirement earnings test works like this: Social Security withholds $1 for every $2 you earn above a certain amount (in 2014, that amount was $15,480). For the year in which you’re going to reach full retirement age, Social Security withholds $1 for every $3 earned above a set amount (in 2014, that amount was $41,400).

For boomers, the full retirement age is 66 or 67, depending on your year of birth. For Gen Xers, it’s 67. For more details, check out the Social Security Administration’s retirement chart.

It’s important to understand the retirement earnings test because more and more people are wrestling with the question of when to retire and when to begin collecting Social Security. After all:

  • People need the income. Pension cutbacks mean many people get smaller private pensions than they once expected, if anything at all. For young workers, the traditional defined-benefit pension that guaranteed a set payment for life has mostly disappeared.

  • Longer lives can mean bigger costs in retirement. Think of future medical bills and other necessities. Fun can cost money, as well. Think of travel, dining out, gifts for grandchildren, and other pleasures.

  • Many people want to stay on the job. Experienced workers often find their jobs fulfilling and enjoy the social camaraderie. The vision of non-working “golden years” seems increasingly irrelevant in the 21st century.

  • If you earn enough money, maybe you can afford to hold off claiming Social Security. By holding off claiming (up to age 70), you get larger monthly payments — perhaps much larger.

  • The lack of a nest egg can put a comfortable retirement out of reach, creating an important reason to earn extra money. Roughly half of workers (if you include part-timers) don’t have access to retirement savings plans in the workplace, such as 401(k) plans.

Although some people may view the retirement earnings test as a tax or as a reason not to work, the issue isn’t quite so simple. After you reach your full retirement age, Social Security begins to pay back the money it withheld by giving you a somewhat higher monthly benefit.

On average, people end up with about the same amount of money, although it takes a while to even out.