How the Social Security Earnings Test May Affect Your Retirement

If you start taking Social Security benefits before your full retirement age and decide to continue working, you need to understand how the earnings test works.

A woman stands in front of a chalkboard with a math formula on it.
(Image credit: Getty Images)

More than half of Americans surveyed by Voya Financial plan to work in retirement. If you share that plan, you may assume that you can easily combine paid employment with other sources of retirement income, such as your retirement savings and Social Security.

However, if you claim Social Security before your full retirement age — which is based on your year of birth — your benefits may be reduced through a mechanism known as the Social Security earnings test. Essentially, this rule limits your benefits if your paid employment earnings exceed certain thresholds.

The good news is that once you reach full retirement age, the benefit amounts that were withheld due to the earnings test will be returned to you in future Social Security payments. However, that doesn’t help when you are trying to balance your budget during the early years of retirement.

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How the earnings test works

The impact of the earnings test on your benefit can be broken down into three distinct phases. Each phase is based on your current age relative to your full retirement age.

  • Stage 1: You will not reach full retirement age in 2021: In this stage, you can earn as much as $18,960 a year from employment without affecting your Social Security benefits. There will be a $1 reduction in Social Security payments for every $2 of earnings over the $18,960 limit. In the event of a reduction, Social Security withholds benefits in the form of whole payments at the beginning of the year. If Social Security withholds too much, that means money will be refunded in the next calendar year.
  • Stage 2: You will reach your full retirement age in 2021 If you will reach your full retirement age during 2021, the earnings test is much less restrictive. You can earn as much as $50,520 a year from employment without affecting your benefit. There will be $1 reduction for every $3 of earnings over the $50,520 limit.
  • Stage 3: You reached your full retirement age before 2021: If you have already reached your full retirement age before 2021, the earnings test doesn’t apply to your earnings. You are free to earn as much as you want while receiving your full benefit.

Special Rule: A special rule exists for filers that fall into phase 1 and 2 who retire from employment mid-year. Regardless of your earnings, if you stop receiving employment income once you collect Social Security, you can collect your entire benefit without reduction due to the excess earnings test.

Social Security claiming primer

The amount of your Social Security benefit depends on your earnings history and your age. Social Security benchmarks all benefits around the concept of full retirement age, which for those born between 1943 and 1960 is between ages 66 to 67.

At full retirement age you receive what is known as your full benefit or primary insurance amount (PIA). If you claim Social Security before your full retirement age, your benefit is reduced. Similarly, if you claim after your full retirement age, your benefit is increased.

The earliest you can claim Social Security is age 62; the latest you can claim to receive the maximum potential benefit is age 70.

Social Security Full Retirement Age Table

A table shows the full retirement ages for Social Security.

(Image credit: Social Security Administration)

Source: U.S. Social Security Administration

Managing employment and Social Security benefits

Ultimately, the Social Security earnings test does not affect the benefit you receive over the course of your retirement because Social Security will make up any benefit reductions later when you reach full retirement age. 

However, this isn’t much comfort when you’re trying to balance your budget in early retirement. That’s why it’s critical to understand the earnings test and weigh all of your possible options when making your Social Security filing decision.

Amy Buttell contributed to this article.

Advisory services offered through J.W. Cole Advisors, Inc & Blue Financial are unaffiliated entities. No information provided is intended as a solicitation to buy or sell any security. Blue Financial is an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax, or investment advice.

Licensed Insurance Professional. The licensed professional can provide information, but not advice related to social security benefits. The licensed professional may be able to identify potential retirement income gaps and may introduce insurance products, such as an annuity, as a potential solution. For more information, contact the Social Security Administration office, or visit 20988 - 2021/5/3


This article was provided by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Austin Powell, CFP®
Partner, Blue Financial

Austin Powell is a wealth adviser at Blue Financial. He has a bachelor’s in business administration from North Carolina State University, where he was also an All-ACC tennis player. He has earned the prestigious CERTIFIED FINANCIAL PLANNER™ certification in addition to being a National Social Security Advisor (NSSA®). He has a Series 65 securities license and a life & health insurance license. As a fiduciary, he operates with full transparency and does what is in the best interest of his clients.