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Credit for Reduced Social Security Benefits When Subject to the Earnings Test

earningsContinuing to work while receiving Social Security benefits may cause a reduction to your benefit – if you earn more than the annual earnings test (AET) amount. But this reduction isn’t permanent – you will get credit for reduced Social Security benefits when you reach Full Retirement Age. So how does this work?

Earnings Test

The earnings test limit is $15,720 for 2015 if you are under Full Retirement Age for the entire year. The limit is $41,880 in the year that you reach Full Retirement Age. Full Retirement Age (FRA) is age 66 if you were born between 1946 and 1954, ratcheting up to age 67 if your birth year is 1960 or later.

So for 2015 if you were born after 1949 and you are receiving Social Security benefits, for every two dollars that you earn over $15,720, one dollar of your benefit is withheld.

For example, if you earn $20,000 in 2015 and your Social Security benefit is $500 per month, that’s $4,280 more than the limit. Your $500 benefit will be withheld for the first 5 months, in order to withhold the full $2,140. The extra $360 will be refunded to you at the beginning of the next calendar year.

The same would happen if you will reach FRA in 2015 and you earn more than $41,880. Let’s say you make $50,000 during the first half of 2015 and you reach age 66 on July 1. Since you’ve earned $8,120 more than the limit before reaching FRA, $1 is withheld for every $3 over the limit. So if your SS benefit is $1,000, in order to withhold $2,707, 3 months’ worth of benefits will be withheld.

The Payback

Once you reach Full Retirement Age, you will receive credit for reduced Social Security benefits. SSA will look at your record to determine how many months’ worth of benefits that you have had withheld due to the earnings test. Your filing age is then re-calculated, adding on those months of withheld benefits.

Returning to our example from above, you were receiving a benefit of $500 per month beginning at age 62, and over the years 15 months’ worth of benefits had been withheld due to the earnings test. At FRA, your filing age is re-calculated as if you had filed at the age of 63 years, 3 months – an addition of 15 months.

Since your original benefit was reduced by 25%, your re-calculated benefit would only be reduced by 18.33% – owing to the fact that the year between age 62 and 63 increases your benefit by 5%, and each month above 63 increases the benefit by 5/9%, a total of 15/9%, or 1.67% total. So your $500 benefit is increased to $544 per month from now forward.

Application

This reduction and payback applies to your own retirement benefit, spousal benefits, and survivor benefits. If your own benefit is withheld due to earnings over the limit, your beneficiaries’ benefits (your spouse’s or children’s benefits) will also be withheld until the reduction amount is completely covered. If you are receiving spousal benefits before FRA and are also working and earning more than the limit, only your spousal benefit is reduced due to those earnings.

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