Social Security: This Poorly Understood Rule Could Reduce Your Benefits — What You Need To Know

A report from the Social Security Advisory Board (SSAB) found that many Social Security beneficiaries don’t understand how the retirement earnings test (RET) works. If you don’t fully understand this rule before you retire, you might make decisions that could reduce your benefits.

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The RET affects those not yet at full retirement age and is working while collecting Social Security benefits, as some people who reach age 62 decide to collect benefits even as they continue working.

Yet the study from SSAB found that 20%-50% of pre-retirees aren’t aware that working while claiming Social Security could reduce their benefits. Additionally, the reduction is only temporary, and benefits will increase once they reach full retirement age (FRA). The study shared that only 30-40% of pre-retirees know this.

Keep reading for a further look at how this rule can affect your future retirement income.

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What Is the Retirement Earnings Test?

The retirement earnings test calculates the benefits a Social Security beneficiary should receive to earn income while collecting benefits. For every $2 you earn over a specific threshold, your earnings will be reduced by $1.

In 2024, the retirement earnings threshold if you have not reached full retirement age is $22,320, according to SSA.gov. If you reach full retirement age in 2024, that threshold increases to $59,520 in the months before you reach FRA.

The month that you reach FRA, there is no earnings limit.

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Why the RET Rule Matters

People may claim social security at age 62, even if they are still working, to increase their earnings as they approach retirement. In light of inflation, many people need that extra cash to live.

But it’s important to understand that you won’t receive the full benefits. It’s even more critical to know that you will receive your full benefits once you reach FRA whether you work or not.

Social Security is designed to replace workers’ wages, so benefits get reduced if you’re still working.

Education Is Key to Better Decisions

The SSAB report found that Social Security field office staff doesn’t always discuss the rules with Social Security applicants, especially if you aren’t working when applying for benefits.

However, older Americans often re-enter the workforce after retirement, whether for additional income, social connection or mental stimulation. They might be surprised to see their Social Security benefits reduced if they weren’t advised of the RET rule.

The SSAB suggested that making the rule easier to understand could help retirees make more informed decisions about their choice to work.

Dangers of Misunderstanding the Retirement Earnings Test

Misunderstanding the RET often prompts retirees to delay collecting benefits until they reach FRA, according to CNBC.com. While this is desirable, misleading the public is not the best way to encourage people to wait to claim benefits, as Emerson Sprick, a senior economic analyst at the Bipartisan Policy Center, told CNBC.

Sprick further indicated that the retirement earnings test won’t change the total lifetime benefits most people receive. Yet if you don’t recognize that, and if you don’t understand that you will receive your full benefits once you reach FRA, you might work less than you want just to stay under that threshold.

The Bipartisan Policy Center is lobbying for the Social Security Administration to do away with the RET rule, as it could encourage healthy, older adults not to return to work. The organization also suggested renaming the test to “temporary benefit withholding,” so that people understand the reduction is only temporary.

Further, it’s important to understand that the retirement earnings test is not a tax, but a temporary benefits reduction. Work after age 62 boosts your lifetime benefits if your earnings are within your 35 highest earning years.

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This article originally appeared on GOBankingRates.com: Social Security: This Poorly Understood Rule Could Reduce Your Benefits — What You Need To Know