A Key Social Security Rule Is Changing in 2027 – Here’s What to Expect

A rule regarding working and collecting Social Security senior benefits
has changed for 2027, and it could impact your benefits. The Social Security
Administration (SSA) increases the retirement earnings test exempt amount each
year to reflect increases in the national average wage index. Increasing the
exempt amount means workers who haven’t yet reached full retirement age may earn
a bit more each year before their benefits are reduced.

If you’re considering working and collecting Social Security benefits, here’s
what the changes might mean for your income and your benefits.

Find Out: 13 moves seniors could benefit from but often forget about.

Who’s affected by the Social Security earnings test

Individuals who claim Social Security before reaching the full retirement age
and continue to work often face a surprise when their Social Security benefits
are withheld because they earn too much. That’s a result of the Social Security
earnings test.

The earnings test only applies to individuals who haven’t yet reached their full
retirement age, which is age 67 for anyone born in 1960 or later. Once an
individual reaches their full retirement age, they’re able to make any amount of
money per year without their benefits being reduced.

Shopping for cheaper auto insurance? Enter your zip code here to get started.

How the earnings test works

The earnings test sets a limit on how much you may make each year. In 2026,
individuals under the full retirement age could make $24,480 before their
benefits were reduced. In 2027, that limit increases to $25,560. If you exceed
the limit, the SSA withholds $1 in benefits for every $2 you earn beyond the
cap.

The limit is higher for individuals who reach full retirement age the same year.
In 2026, that limit was $65,160, and it increases to $67,920 in 2027. If you
exceed the limit, the SSA withholds $1 in benefits for every $3 you earn beyond
the cap during the months before you reach full retirement age.

What happens to withheld benefits

The SSA only temporarily withholds your benefits. Once you reach the full
retirement age, the SSA recalculates your benefits and credits you the benefits
that were withheld. You’ll receive those benefits, just not in the form of a
lump sum.

Additionally, once you reach full retirement age, the earnings limit no longer
applies. You may continue working and collecting benefits, and you may also
continue to contribute to your retirement accounts.

Save Money: Things to cut when living on retirement (many people ignore #11)

Income types that don’t count toward the earnings test

Only wages and self-employment income count toward the earnings test. Other
types of income, like investment income, pensions and annuities, veteran and
military benefits, and rental income don’t count toward the earnings test.
Additionally, IRA or retirement withdrawals, inheritances and capital gains, and
your spouse’s salary or wages don’t count toward the income test.

How working and collecting Social Security might increase your benefits

It may be frustrating to see that some of your benefits are withheld because
you’re working and your income exceeds the earnings test, but working while
collecting Social Security may help boost your future benefits.

Your Social Security benefits are calculated based on your highest 35 years of
earnings, so if you’re earning more in your sixties than you earned previously,
continuing to work could replace some of your lower-earning years. Those higher
earnings might increase your future benefits payments. Plus, remember that
benefits withholding is temporary, and once you reach full retirement age, the
SSA recalculates your benefits, including the benefits that were withheld.

How working and collecting Social Security might affect your taxes

Though working and collecting Social Security may ultimately increase your
future benefits payments, it may also affect the taxes you pay on Social
Security benefits. If your combined income exceeds certain tax thresholds, you
might be required to pay taxes on up to 85% of your Social Security benefits.

Your combined income consists of your adjusted gross income, nontaxable
interest, and half of your Social Security benefits. For example, if you’re a
single filer, a combined income of $25,000 to $34,000 means that up to 50% of
your benefits might be taxable. If your combined income is over $34,000, then up
to 85% of your benefits might be taxable.

Bottom line

The higher Social Security earnings test limit means you may be able to earn
more in 2027 before a portion of your benefits are withheld. This higher limit
may be particularly valuable for near-retirees who are working to maximize their
higher-earning years before retiring, who want to work a few more years to build
up their retirement fund, or who aren’t yet ready to fully retire and want to
continue earning some income while collecting benefits.

If you’re planning to work in 2027, this may be a good time to reevaluate your
budget and possibly consult with a tax professional and a financial planner.
These professionals may review your retirement plan and help
you understand any financial implications of your choices, so you know just what
to expect.

More from FinanceBuzz: