Earnings Test Overview
If a client is working while taking Social Security, their benefits may be reduced due to the Annual Earnings Test Adjustment. This only applies to individuals who have not yet reached Full Retirement Age (FRA). The earnings test reduces Social Security benefits before FRA, and then increases benefits for the remainder of the client’s life once they reach FRA. The amount of the adjustment depends on how long the client works after filing for benefits, as well as how much they earn during those years.
For more details on Receiving Benefits While Working or How Work Affects Your Benefits, you can reference these links from the Social Security Administration.
Impact of AET on Social Security
Clients that are younger than FRA and earn more than the yearly earnings limit will see their benefits adjusted due to the Earnings Test. Benefits may be reduced or withheld during the client’s working years, and will be paid back after the client reaches Full Retirement Age. The earnings test adjustment in RightCapital applies to all Social Security benefits including retirement, spousal, and survivor:
Once clients reach Full Retirement Age, their earnings will no longer reduce their benefits, no matter how much they earn. Social Security benefits from that point onwards will be recalculated to give clients credit for the months that benefits were reduced or withheld due to excess earnings. Over a typical lifespan, most individuals will recoup most or all of their benefits withheld before FRA.
How AET is Calculated
Social Security withholds benefits due to AET if your earnings exceed a certain level, called the earnings test exempt amount (or yearly earnings limit). One of two different exempt amounts apply - a lower amount in years before you attain FRA, and a higher amount in the year you attain FRA. Social Security benefits are reduced by $1 for every $2 of earnings in excess of the lower exempt amount, and $1 for every $3 of earnings in excess of the higher exempt amount.
- For 2024, the lower threshold is $22,320. This lower threshold is used in the years before attaining FRA.
- The higher threshold is $59,520. The higher threshold is used in the year that the client reaches FRA, and applies to the months leading up to FRA.
These thresholds increase with inflation every year (in RightCapital, thresholds will increase according to your Social Security Inflation Rate).
Clients that are younger than FRA for the duration of 2024 can expect a reduction in benefits according to the following equation:
(2024 Earnings - $22,320) / 2 = Reduction In Benefits
Clients who reach FRA in 2024 can expect a reduction in benefits according to the following equation:
(2024 Earnings - $59,520) / 3 = Reduction In Benefits
After reaching FRA, client’s impacted by AET will see their benefits recalculated to give them credit for the number of months that their benefits were reduced or withheld. This will provide a higher benefit amount going forward by removing some or all of the reduction factors from the initial payment calculation.
Click here for the SSA’s Retirement Earnings Test Calculator.
Earnings Test in RightCapital
