Retirement earnings test (US)
The Retirement Earnings Test (RET) is a provision within the United States Social Security system that can temporarily reduce Social Security benefits for individuals who are receiving benefits and have not yet reached their full retirement age (FRA), if their earnings exceed a certain annual limit. The purpose of the RET is to balance the incentive to work with the provision of retirement income.
How it Works
The RET works by reducing benefit payments based on earnings above a specific annual exempt amount. The exempt amount changes each year and is determined by the Social Security Administration (SSA).
For individuals claiming Social Security benefits before their full retirement age, the SSA generally deducts $1 from benefit payments for every $2 earned above the annual exempt amount. In the year an individual reaches full retirement age, the deduction is $1 for every $3 earned above a higher annual exempt amount, but this rule only applies to earnings before the month the individual reaches full retirement age.
Full Retirement Age (FRA)
Full retirement age is the age at which an individual can receive 100% of their Social Security retirement benefits. The FRA varies based on the year of birth. For those born between 1943 and 1954, the FRA is 66. The FRA gradually increases to 67 for those born in 1960 or later.
After Full Retirement Age
Once an individual reaches their full retirement age, the Retirement Earnings Test no longer applies. Individuals can earn any amount without having their Social Security benefits reduced.
Recoupment of Withheld Benefits
While the RET might reduce benefit payments before full retirement age, these reductions are not permanent. When an individual reaches full retirement age, the SSA recalculates their benefit amount to account for the months in which benefits were reduced due to the RET. This recalculation results in a higher monthly benefit payment, effectively recouping the benefits that were previously withheld.
Earnings Included
The earnings that are subject to the RET include wages from employment and net earnings from self-employment. Investment income, pensions, annuities, and other forms of unearned income are generally not included when determining earnings for the purpose of the RET.
Reporting Earnings
Social Security beneficiaries who are subject to the RET are responsible for reporting their earnings to the SSA. The SSA may also obtain earnings information from employers and the IRS.
Exempt Amounts (Example)
(Note: Specific exempt amounts are subject to change annually. Consult the Social Security Administration website for current figures.)
Hypothetically, for the year 2023, the annual exempt amount might be $21,240. An individual earning above that amount would have their benefits reduced according to the $1 for every $2 rule.
Criticisms and Considerations
The Retirement Earnings Test is a subject of ongoing debate. Critics argue that it discourages older workers from remaining in the workforce and that it is unnecessarily complex. Supporters argue that it helps target Social Security benefits to those who need them most. The impact of the RET on individual retirement decisions should be carefully considered, along with personal financial circumstances and other retirement planning factors.