Retirement Earnings Test: Why You Must Know About It

The primary objective of Social Security benefits is to provide income to workers who are now retired. That doesn’t mean that those who have reached the minimum retirement age but are still working won’t get Social Security. Although such people are still eligible, some benefits are temporarily withheld until they reach their full retirement age (FRA). Moreover, these people need to do the Retirement Earnings Test (RET), which helps the Social Security Administration (SSA) determine the amount of benefits to withhold.

Retirement Earnings Test (RET) – What Is It?

When a working person claims Social Security before reaching FRA and earns above a certain threshold, they are subject to the retirement earnings test. As noted above, the RET temporarily reduces the benefits for the recipients until they reach the FRA but increases benefits for the rest of their lives after they reach FRA.  

In other words, the benefits that the SSA withheld are not lost forever; rather they are added to the recipients’ monthly benefit after they reach FRA. It means that once the claimant reaches FRA, the SSA restores the previously withheld benefits by increasing their monthly benefits permanently.

It wouldn’t be wrong to say that beneficiaries subject to the RET receive more or less the same amount in total as the beneficiaries not subject to the RET.

Along with affecting the recipient’s benefits, RET can also impact spousal benefits. If you or your spouse is working while collecting the worker or spousal benefits before FRA, the SSA can withhold both of your benefits.

How Much Benefits Are Withheld?

How much the SSA withholds depends primarily on how close the recipient is to FRA. For instance, the SSA withholds $1 in monthly benefits for every $2 of annual earnings above a certain threshold if the recipient will hit FRA in more than a year. 

The threshold income in 2023 is $21,230. So, if your income were $28,130 in 2023, your benefits would be reduced by $3,450. The SSA will withhold your benefits starting in January until your total benefits withheld equals $3,450. After this, your benefits will resume as normal.

The penalty for failing the test is less severe in the year you reach FRA. Recipients who will reach FRA in the current year are subject to a $1 reduction in benefits for every $3 of annual earnings above the threshold.

How Does It Work?

The Retirement Earnings Test is a simple test. Those who earn below a threshold income in a year pass the test, and if their income is above the threshold, they fail the test.

In the RET, the SSA looks at your monthly earnings in your first year of retirement. If your monthly earnings are below the threshold income, you get full benefits for that month.

If you fail the test, i.e., your earnings are above the threshold, your benefits are reduced ($1 for every $2 of earnings above a certain threshold).

Once you reach FRA, the SSA recalculates your benefits. For this calculation, the SSA adds all the benefits that you lost after failing the RET and divides it by the sum of your standard monthly benefit.

The resultant figure is the number of months’ worth of benefits you lost because your earnings exceeded the threshold. The SSA then uses that number to recalculate your base monthly payment as if you delayed filing the benefits for that many months.

Suppose your standard monthly benefit is $1,000, and your total forfeited benefit is $15,000. The number of months’ worth of benefits you gave up is 15 ($15,000 divided by $1,000).

Your benefits will then be recalculated as if you filed for benefits 15 months after what you originally filed. That means if you originally filed for benefits at 62 years, the new benefits will be calculated as if you filed at 63.5 years (15 months after).

Is It Needed?

The Retirement Earnings Test was part of the first Social Security legislation, which was approved by President Franklin Roosevelt at the time of the Great Depression in 1935. The RET has witnessed several legislative changes since 1935, but it still remains an important part of the Social Security system.

It was a common belief initially that the RET was introduced to encourage older employees to leave the workforce to make room for younger workers at the time of the Great Depression.

Later, however, experts pointed out that the RET was included in the Social Security Act primarily because it is meant to work as an insurance scheme. This means that RET’s job is to compensate people who witness loss of income because of retirement.  

Although RET is a vital part of the Social Security ecosystem, it can confuse people planning their retirement. This is because not everyone understands how the RET works, including the fact that the benefit reduction is temporary.

Such unawareness may push beneficiaries to limit or eliminate their earnings to avoid failing RET. Thus, due to such concerns, many legislators in the past have called for repealing the RET entirely in order to support longer careers and greater personal savings.

Final Words

If you are unaware of the Retirement Earnings Test (RET), it may become a major headache for you when claiming benefits. Even if you are aware of RET, it is important that you get your calculations correct so that you can take advantage of getting the most benefits when you need them the most.

If you’re planning to rely heavily on Social Security benefits, you must understand how working after retirement can impact your benefits. You can use the SSA’s Retirement Earnings Test Calculator to get an idea of how your estimated earnings at the time of claiming your benefits can impact your monthly payout.  

This article originally appeared on ValueWalk

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