Can I Work and Still Receive Social Security Benefits?
August 13, 2014
By Jeff Young
I receive on an ongoing question: “Can I work and still collect social security?” The question really should be: “Is there a penalty on social security earnings if my income exceeds a certain threshold?” All social security income taken prior to full retirement age (FRA) is subject to an earnings test. FRA is age 66 for those born between 1943 and 1954 and gradually goes up to age 67 for those born between 1955 and 1960. Earnings received prior to FRA are subject to the earnings test. Once a taxpayer reaches FRA, additional earnings can be of any amount of money and will not be affected by an earnings cap. However, those earnings may be subject to taxation of course, but that is altogether a different matter.
In the years prior to turning full retirement age, a $1 is surrendered in social security for every $2 earned over $15,480. In the actual year that one turns FRA, a $1 is surrendered for every $3 over $41,400. These limits increase each year due to the adjustment for inflation. It is important to remember that earnings are calculated for the purposes of determining whether or not the limit has been exceeded on an individual income only. For example, a couple’s annual Adjusted Gross Income may be $75,000, but if a spouse’s individual income is under the earnings threshold, his or her social security income would not be subject to reduction even if the other spouse was earning $60,000.
For a person taking social security prior to FRA and earning $42,000, their social security earnings would be reduced by $13,260 in 2014. Our calculation: $42,000 – $15,480 = $26,520 divided by $2 = $13,260. It really isn’t accurate to call this a penalty; however, a person’s social security income would reflect the calculation in higher payments later on. For instance, if social security was collected at age 62 and the taxpayer had enough income to delay payments for 12 months, it would be as if the person applied for social security at age 63, which of course would result in higher payments. Not to mention the added year of income and payments into the system.
For the year in which the taxpayer turns FRA, the rules change as described above. The threshold not only increases, but only those months prior to FRA. For the Boomer born in November of 1948, that person would be subject to the pro-rata limit of $41,400 for the first 11 months only, with the last month of the year not being subject to the earnings test.
Generally speaking, taking social security early is not a good idea for several reasons; one exception is the inability to maximize income. Some people will apply for social security at the earliest age of 62 with plans to earn up to the limit, thinking that it’s a smart strategy. The actual result is they are locking in the lowest of both social security payments and earnings capability. If they’re married, the results can be catastrophic, especially if they live long lives.
If you are considering collecting social security benefits before your full retirement age, be prepared to limit what income you receive or be prepared to surrender some or all of your social security payments if you make above the threshold. Fully understand what the long term ramifications are as well because once you decide to take social security early, it may be difficult, if not impossible, to change your mind later.