Social Security can withhold retirement benefits from workers. Experts say many misunderstand the rule.

Two Republican lawmakers want to eliminate a little-known Social Security rule that can temporarily reduce benefits for people who claim benefits early and keep working.

The Senior Citizens’ Freedom to Work Act — introduced by Republicans Sen. Rick Scott, from Florida, and Rep. Greg Murphy, from North Carolina — would eliminate the Retirement Earnings Test (RET), the system that withholds $1 from payments for every $2 earned above the annual limit for many early beneficiaries.

The bill, first introduced in the spring, remains in committee, where the Senate Special Committee on Aging is examining whether eliminating the Retirement Earnings Test would allow early Social Security beneficiaries to earn more from work without having benefits withheld.

Experts told Yahoo News that a “widespread misunderstanding” of the earnings test has frustrated many workers, and may even be causing some to earn less than they otherwise would.

While the earnings limit has long confounded workers in their 60s, experts say many people misunderstand a key feature of the rule: that benefits withheld under the test aren’t necessarily lost and are generally reflected in higher monthly payments after full retirement age is reached.

What is the Retirement Earnings Test?

The Retirement Earnings Test is a Social Security rule that can temporarily withhold some of your payments if you claim benefits before full retirement age and continue working while earning above a certain limit.

Full retirement age (FRA) is a point in time between ages 66 and 67, depending on your year of birth, but Social Security allows workers to start collecting reduced retirement benefits at 62.

“Currently, the retirement earnings test applies to those receiving Social Security benefits prior to the full retirement age who continue working and earn above $24,480 per year,” Gopi Shah Goda, director of the Retirement Security Project at the Brookings Institution, a Washington-based think tank, told Yahoo News.

Those affected by the test lose $1 in benefits for every $2 they earn above the threshold.

A much higher earnings limit applies in the year someone reaches full retirement age. Withholding falls to $1 for every $3 earned above that limit, and only earnings before FRA count.

Importantly, Social Security later adjusts monthly benefits upward to account for months in which benefits were withheld.

“These benefits are paid back once someone is older than the full retirement age — with an adjustment to account for the fact that they were not received prior,” Goda added.

How does it work?

While the Retirement Earnings Test (RET) faces plenty of criticism, it has some advantages.

If you claim Social Security early and keep working, the government may hold back some checks while you’re under full retirement age.

Then, once you hit FRA, your monthly payment is recalculated upward under a Social Security adjustment that increases benefits after full retirement age, which means claimants gradually recover those withheld amounts.

“Social Security benefits are based on average lifetime earnings and additional work in their older years can sometimes bump up a person’s average,” Kathleen Romig, a senior fellow at the Center on Budget and Policy Priorities, told Yahoo News.

In the example below, the Social Security Administration (SSA) uses a 66-year-old woman who is still working to illustrate how the payments actually work in practice.

As she is still working and earning enough to trigger the Retirement Earnings Test (RET), her benefit is temporarily reduced from $1,000 to $655 per month before she reaches full retirement age.

The dotted line shows what her benefit would have been without the RET. After reaching full retirement age, the SSA increases her monthly payment to account for benefits withheld earlier.

Based on SSA’s illustrative example using a typical lifespan of 86 years, the woman would have $16,800 added back after full retirement age, compared to $16,560 withheld before — a nominal increase of $240.

“People are extremely aware of when their Social Security benefits are withheld. In fact, many people see it as a tax on work — and a steep tax at that,” Romig said.

“But no one has ever heard of ARFs [Adjustment of Reduction Factors], and few are aware that working beneficiaries ultimately get that money back. So Congress gets lots of angry calls about this.”

It’s also worth bearing in mind that “not all working beneficiaries are affected,” Romig noted, just those who earn above the threshold.

“While certain guardrails are in place to ensure the viability of Social Security and incentivize participation in the workforce, the Retirement Earnings Test does neither and is a bureaucratic hurdle that does more harm than good,” Sen. Murphy said.

What are the drawbacks of the Retirement Earnings Test?

Supporters of the proposal argue that the earnings test discourages older Americans from working and that repealing it could encourage more people to remain in the labor force.

If the rule were scrapped, it would allow affected beneficiaries to receive more of their benefits immediately, rather than waiting until they reach an older age for adjustments after full retirement.

“Given the fact that the retirement earnings test is widely misunderstood and evidence shows it leads people to work less than they would otherwise, there is not a strong case for keeping it,” Gopi Shah Goda said.

“People get so upset about the prospect of withholding that they decide not to work at all, or to hold their earnings below the threshold,” Romig explained. “That’s not really great in an era when we’re generally encouraging people to work longer and save more, if they can.”

Many people also don’t work as long as they expected or hoped to.

“Sometimes they develop a work-limiting health condition. Sometimes they need to provide care to a parent or spouse, child or grandchild. Sometimes they’re laid off — and it’s much harder to get a job when you’re unemployed at older ages,” Romig added.

Romig thinks that “retirees should continue to work as long as they can, given their circumstances.”

“If they also choose to receive Social Security benefits, they should expect that some or all of their benefits will be temporarily withheld,” she said. “But they should also understand that any withheld benefits will be returned to them later in their retirement.”

Goda agreed. “People currently hit by the test should not let the reduction in benefits impact their choice of working, as the reduction in benefits is not permanent and the withheld benefits will be paid back after they cross the full retirement age,” she added.