Social Security - How does the earnings limit work?

S.F. Ehrlich Associates |

While a Social Security recipient can collect her retirement benefit any time between 62 and 70, that doesn’t mean she has completely unfettered access with no strings attached. In fact, the Social Security earnings limit might prevent someone from collecting their full retirement benefit if they have employment earnings.  

Whether or not your Social Security retirement benefits are subject to the earnings limit depends on your income level.  In 2017, if you have more than $16,920 in earnings, the earnings limit begins to kick in as follows...

  • For every $2 you earn above the limit of $16,920, your Social Security retirement benefit is reduced by $1.  For example, let's say Tony, 62, decides to collect his retirement benefit upon eligibility.  The amount he'd otherwise be entitled to collect beginning at age 62 is $1,000 per month or $12,000 per year.  If Tony continues to work, however, and earns $25,000 per year, the earnings limit calculation would be: Tony's income ($25,000) minus the earnings limit ($16,920) divided by 2 (to account for the $1 reduction in retirement benefit for every $2 of earnings above the earnings limit). Thus, Tony's benefit would be reduced by $4,040, falling from $12,000 per year to $7,960.  The decrease in his benefit will be applied to the first three months of the year; it will not be spread evenly throughout the year.
  • The earnings limit only applies prior to Full Retirement Age (FRA).  If you were born in 1943-1954, your FRA is 66, if you were born between 1954 and 1960, your FRA is somewhere between 66 and 67, and if you were born in 1960 or later, your FRA is 67.  In other words, once you reach Full Retirement Age, you can earn as much money as you want without having to worry about seeing a reduction in your Social Security retirement benefit.
  • The calculation is handled a bit differently the year you reach Full Retirement Age.  If you reach your Full Retirement Age in 2017, the Social Security Administration will reduce your retirement benefit by $1 for every $3 you earn above an earnings limit of $44,880.  The Administration will only count earnings up until the month you reach Full Retirement Age.
  • The earnings limit only applies to earned income; dividend and interest income, capital gains, pensions and government payments are not considered earnings.  If you’re self-employed, the Social Security Administration only includes your net income (not gross income) when determining whether you hit the earnings limit.
  • If you have money withheld because you earn more than the earnings limit while collecting your retirement benefit prior to Full Retirement Age, is that money lost to the Social Security Administration?  The answer is No.  Any money withheld as a result of earnings in excess of the earnings limit is added back to your retirement benefit calculation resulting in a higher benefit payment once you reach your Full Retirement Age.  In other words, you should never turn down work or employment income solely for the fear of losing out on Social Security benefits. 
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