Why is there a Social Security earnings limit?

Dear Rusty: I try to read your article each week and appreciate the information you provide. I am 62 and considering my retirement options and when I should do that to get the most benefit. I understand my full retirement age is 67, but what I don’t understand, and I hope you can answer, is why there is such a thing as the Social Security earnings limit? I know that if I was to retire before 67, my benefits would be reduced. But since I have been paying into SS for 45+ years, and that money is technically money I have earned, why does SS care if I make more than the earnings limit? It doesn’t affect them or my benefits. Can you tell me about the reasoning behind the earnings limit? I will, for many years after “retiring,” continue working in my field. Signed: Working American

Dear Working American: This is a great question and, as a point of interest, our parent company, the Association of Mature American Citizens, advocates doing away with Social Security’s earnings test which affects those collecting benefits before reaching their SS full retirement age. In AMAC’s view, it discourages people from working and, thus, paying Social Security taxes on their earnings. It is, after all, SS taxes from the earnings of working Americans which largely pays for the benefits provided to Social Security beneficiaries. Eliminating the restriction would tend to improve Social Security revenue and help ease Social Security’s current financial stress.

The reasoning behind the earnings test? Well, when Social Security was first enacted in the 1930s, the intent was that Social Security was for retired workers, meant to keep them from poverty in old age. The logic back then was that if a person worked they didn’t need Social Security to sustain them, so those who worked could not collect Social Security at all. The current rule, after many adjustments over the years, says that annual earnings for those who collect early SS benefits are limited. If each year’s earnings limit ($22,320 for 2024) is exceeded, Social Security will take away $1 in benefits for every $2 over the limit (FYI, the penalty is less severe in the year FRA is attained).

Historical accounts suggest that the reasoning behind the wording in the original Social Security Act – that “No person shall receive such old-age annuity unless … he is not employed by another in a gainful occupation” — was quite controversial, except for the fundamental thought that if someone worked they didn’t need Social Security. Over the ensuing decades the rule has been softened to provide that only those who collect benefits before their full retirement age would have a portion of their SS benefits offset by their work earnings. In any case, the earnings test, in its mitigated form, still persists today. FYI, H.R. 5193 – The Senior Citizens Freedom to Work Act was recently introduced in Congress proposing to repeal the SS earnings test but has not advanced in the legislative process since introduced in August 2023.

In any case, under current rules, if you continue working after your FRA, the earnings test will not apply to you. And, if you lose any benefits before your FRA due to the earnings test, when you reach your FRA you’ll get time credit for any months that benefits were withheld, resulting in a somewhat higher monthly payment after your full retirement age.

One final point: if you continue to work after starting your Social Security benefits and your recent earnings are higher than any of those in the inflation-adjusted 35 years used to originally calculate your benefit, your entitlement will be recalculated to give you credit for those higher recent earnings.