With a rapidly growing aging population, securing Social Security funds is now more crucial than ever. But how did we get here in the first place?


When it comes to Social Security, there are plenty of misconceptions.

And many of the misconceptions have to do with Social Security’s earnings test.

The earnings test reduces the program’s Old Age and Survivors Insurance benefits in a given year as a proportion of a claimant’s earnings above an exempt amount in that year, according to a paper presented at the 2020 Retirement and Disability Research Consortium.

Social Security explains it this way: “For people attaining normal or full retirement age (NRA) after 2020, the annual exempt amount in 2020 is $18,240. For people attaining NRA in 2020, the annual exempt amount is $48,600. This higher exempt amount applies only to earnings made in months prior to the month of NRA attainment.”

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And it works like this: Social Security withholds $1 in benefits for every $2 of earnings in excess of the lower exempt amount, and withholds $1 in benefits for every $3 of earnings in excess of the higher exempt amount. Earnings in or after the month you reach NRA do not count toward the retirement test.

So what are the misconceptions?

► Benefits lost today are not lost forever. Beneficiaries don’t appreciate the fact that benefits lost today are not gone forever, says Daniel Sacks, an assistant professor at Indiana University and co-author of “Misperceptions of the Social Security Earnings Test and the Actuarial Adjustment: Implications for LFP and Earnings.”

Sacks gave this example: For each dollar your earnings exceed a threshold – the “exempt amount” – your monthly benefits get reduced by 50 cents. So, if you earn $19,240 in 2020, $1,000 over the exempt amount, you’ll lose $500 of benefits.

But beneficiaries fail to realize this: “For every dollar you lose, you get back in the form of higher future Social Security benefits,” says Sacks. “If you lose $500 in benefits this year, then when you reach full retirement age, you’ll get a bigger benefit every month, and the difference basically keeps you whole.”

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The way this adjustment happens, however, can be confusing, says Sacks. If your earnings are too high one year (say, at age 63), you may lose a whole benefit check next (at age 64), and then you get a refund at the end of the next year for any excess benefits withheld.

“You don’t fully get the benefits back until after you reach normal retirement age, when you get higher monthly benefits,” he says. “Eventually, you get your benefits back, there’s not a strong reason to worry about the earnings test. But we see people worry a lot about it – they clearly try to keep their earnings low to avoid losing benefits.”

Others also note the adverse financial effects of this misconception. “The biggest misperception is failing to take into account the bigger picture,” says Elaine Floyd, the director of retirement and life planning at Horsesmouth. “People who try to limit their earnings in order not to have Social Security benefits withheld are depriving themselves and their families of the financial resources available through continued work.”

Overreact to the earnings test. According to Sacks, many beneficiaries earn below the exempt amount ($18,240 in 2020), and relatively few people earn above it. And that’s a mistake. “There’s very little cost to having your earnings just above the exempt amount,” he says. “You only lose a few dollars in benefits. You only lose benefits for 50% of the income you earn above the exempt amount, not 50% of all your income.”

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Spousal/dependent benefits reduced too. Floyd also notes that beneficiaries fail to realize that auxiliary benefits paid off their record, such as spousal or dependent benefits, will also be withheld for the earnings test if they are under FRA and work. “For example, sometimes a working husband will want to apply before FRA so his wife can start her spousal benefit,” she says. “He understands that his own benefit will be withheld for the earnings test but doesn’t realize that her spousal benefit will be withheld as well.”

The self-employed face extra scrutiny. Self-employed people face scrutiny because of the possibility of manipulating their salary, says Floyd. For instance, Social Security looks at whether someone who is self-employed is actively working in the business. “If they spend more than 45 hours a month working in the business, they are considered “not retired” and their benefits will be withheld,” she says.

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The nitty gritty. Floyd also notes that beneficiaries sometimes don’t understand that in the first year, earnings prior to application won’t count. But if they earn more than $1,520 (in 2020) in any month after applying for benefits, their benefit for that month will be withheld. “For example, someone could earn $100,000 from January to June and apply for benefits in July,” she says. “If they have no further earnings after June, no benefits will be withheld.”

Don’t even think about the earnings test. According to Floyd, people should work as long as they can and earn as much as they can without regard to the Social Security earnings test. “Delaying benefits past FRA and working longer to improve the earnings record can help people maximize their Social Security benefits and achieve greater financial security,” she says.

Robert Powell is the editor of TheStreet’s Retirement Daily and contributes regularly to USA TODAY. Got questions about money? Email Bob at [email protected].

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