If you receive Social Security retirement benefits and are still working, you may see your monthly payments reduced, depending on your circumstances.
But that all could change if one proposal — the Senior Citizens’ Freedom to Work Act — becomes law.
The bicameral bill, recently proposed by Sen. Rick Scott, R-Florida, and Rep. Greg Murphy, R-North Carolina, would repeal a provision known as the retirement earnings test. It reduces Social Security benefits for individuals who start retirement benefits early and continue to work.
The retirement earnings test affects those who claim Social Security before full retirement age, when beneficiaries are eligible for 100% of the retirement benefits they’ve earned. That typically is age 66 to 67, depending on year of birth.
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In 2026, individuals under full retirement age can earn up to $24,480 for the year before the retirement earnings test applies. For income over that annual limit, the Social Security Administration will deduct $1 from benefits for every $2 earned.
Individuals who reach full retirement age in 2026 have a higher earnings limit of $65,160. For income over that threshold, the Social Security Administration will deduct $1 in benefits for every $3 in earnings for the months prior to their birthday.
Once a beneficiary reaches their full retirement age, benefits are no longer reduced based on earnings.
Notably, beneficiaries affected by the retirement earnings test will have their benefits recalculated once they reach their full retirement age to credit for the months their benefits were reduced or withheld, according to the Social Security Administration.
“This bill will get rid of the unfair retirement earnings test so that seniors who want to stay in the workforce can do so without being punished or robbed of their hard-earned benefits,” Scott said during a March 25 Senate aging committee hearing.
It remains to be seen whether the Republican-led bill to eliminate the retirement earnings test may gain traction on Capitol Hill.
Scott introduced the bill in the Senate on March 24, where it was referred to the Senate Committee on Finance. Murphy introduced the companion measure in the House on April 16, where it was referred to the Committee on Ways and Means.
Retirement earnings test can be ‘disincentive to work’
The proposal to nix the retirement earnings test comes as workers ages 55 and over are the fastest-growing age group in the labor force, Scott said during his testimony.
The Society of Human Resource Management, or SHRM, is “advocating very heavily” for revisiting the retirement earnings test provision, Johnny C. Taylor, Jr., president and CEO of the human resources society, who testified at the Senate aging committee hearing, told CNBC.com.
“For people who make a lot of money, it doesn’t matter to them,” Taylor said. “But if you’re in that middle income or lower bracket, where losing dollars in the moment will mean the difference between you being able to pay for your medicine or food, then that is a disincentive [to work], period, full stop.”
Social Security retirement beneficiaries already face consequences for claiming benefits early. If they start benefits at age 62, the earliest retirement claiming age, they may see a reduction of as much as 30%, according to the Social Security Administration.
By waiting to claim until full retirement age, beneficiaries receive 100% of the benefits due to them. But for every year beneficiaries delay from full retirement age up to age 70, they may see their benefits increase by 8%.
What experts say lawmakers need to consider
The retirement earnings test, which was created in 1935, is a “relic of the Great Depression” when policy makers wanted to push older Americans out of the work force to free up jobs for younger workers, Rachel Greszler, senior research fellow at the Plymouth Institute for Free Enterprise, said in her testimony at the Senate aging committee hearing.
The retirement earnings test is “little known and often misunderstood,” Greszler said.
“While those lost benefits are gradually added back in to recipients’ monthly checks after they reach full retirement age, most people don’t know that, and they perceive the test as a pure tax and subsequently reduce their earnings or stop working altogether,” Greszler said.
Individuals with lower life expectancies may not recoup all or any of those lost benefits, she said.
The retirement earnings test costs the Social Security Administration $70 million per year to administer, according to Greszler, and can trigger improper payments, where beneficiaries are required to return some of their benefit income to the agency if they have been overpaid.
A law signed by President Bill Clinton in 2000 made it so the retirement earnings test no longer applied to workers over the full retirement age.
Many seniors who were not covered by that 2000 law complained they had been left out, Dan Adcock, director of government relations and policy at the National Committee to Preserve Social Security and Medicare, said in his testimony to the Senate aging committee.
“I know from attending town halls with seniors that repealing the [retirement earnings test] would be extremely popular,” Adcock said.
However, before making that change, lawmakers ought to consider the impact it would have on seniors as well as the solvency of Social Security’s trust funds, which face projected depletion dates in less than a decade, he said.
The Social Security Administration’s actuaries have found repealing the retirement earnings test will ultimately reduce trust fund costs, Adcock said. However, in the short term, repealing the provision would require paying more benefits, which could affect the program’s funding as its combined trust fund reserves are projected to run out in 2034, he said.
How to plan around the earnings test
For now, Social Security beneficiaries who have not yet reached their full retirement age still need to consider how the retirement earnings test may affect their income.
When clients hear reduced benefits, they often assume they should stop working or turn down opportunities, said Mark Stancato, a certified financial planner, enrolled agent and founder of VIP Wealth Advisors in Decatur, Georgia.
“A lot of people don’t realize that you might get this reduced benefit right now, but you’ll get it back,” Stancato said. “It’s not a permanent penalty.”
Other factors also need to be considered, such as how much continuing to work matters in light of personal goals, he said.
Individuals who want to continue working also need to consider when the best time to claim Social Security benefits is, based on their circumstances. If they do decide to claim, they also need to weigh how the extra income from work may affect the taxes on their Social Security benefits, Stancato said.
To find out how the retirement earnings test may affect you, the Social Security Administration has a calculator on its website.