How Earned Income Affects Social Security in Retirement

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Many people continue to earn at least some income after they've officially retired. Joining me to discuss the intersection between Social Security benefits and earned income is Andrew Salata. He is a public affairs specialist with the Social Security Administration.

Andrew, thank you so much for being here.

Andrew Salata: You're welcome. Thank you for the opportunity to talk a little bit about what we can do after we've received Social Security benefits. After working so long to get them, it's always good to know what our options are in our retirement.

Benz: Absolutely. We've got a lot of people who are continuing to stay in the workforce at least on a part-time basis after they've retired and perhaps after they've started Social Security benefits. So, this is an important discussion point.

Kind of a key aspect of this is this issue of full retirement age and where you are relative to full retirement age does determine the extent to which Social Security benefits will be affected by earned income. So, let's start by just talking about full retirement age. I know it's kind of a moving target depending target on your age, but let's start there.

Salata: OK. Back in 2000, our full retirement age, kind of started moving away for those born 1938 and later. For the recent years, we've had a pretty standing age 66 full retirement age for those born 1943 through 1954. This year, we're starting to have that moving, so I get a little bit more excitement in my talks about retirement because I get to change that retirement age or talk a little bit about that change, because this year if you're turning 62, you were born in '55 and your full retirement age is 66 and 2 months. And now, each year it will go up two months until we get to those retiring in, what is it, 2022 when you were born 1960 or later, your full retirement age is 67. And from there we'll have another static retirement, full retirement age.

So, what the basic--the important thing to consider with full retirement age is, at full retirement age you get your full Social Security benefit, but also at that point the work restrictions on what you can earn from work and still receive from Social Security are lifted.

Benz: OK. So, if I'm full retirement age, I'm kind of home-free when it comes to work income. It's not going to affect my Social Security benefits. But let's say, I was one of those early filers, where perhaps I filed at age 62, and yet to supplement my income I'm still out there earning some income as well. Let's talk about how Social Security reduces benefits while you are earning income at that life stage, if you were an early filer?

Salata: OK. And with if you file early, there is a lower limit. Currently, this year the limit is $16,920 that you can receive from work earnings or self-employment earnings. So, it's really only your wages or your net self-employment income that we count toward that limit. It's not going to be deferred income, it's not going to be your pension or 401(k) benefits or anything that you may have received from previous work. It's just the current work that you're doing now that is restricted to that limit. And what happens is, if you earn over that $16,920, for every $2 you would earn over, we hold back $1 from the Social Security checks.

So, to give a numbers example, if your Social Security benefit is $1,700 a month and say, you were going to earn $37,000 this year, so you're still continuing to work at a higher rate, for the two-for-one reduction it would come out to be holding about half of the year's check, so about six checks. So, we pay six checks. So, an individual still get about $7,200 plus their work earnings of $37,000, and then we would do that each calendar year. So, it's not from when someone turns 62, but from January through December calendar year that we look at the earnings limit.

Benz: OK. So, you get some of that back though? It's not like it's permanently withheld if, when I stop working or when I hit full retirement age, I will be eligible to receive some of those monies that have been withheld?

Salata: Yes. What happens is, because when you take Social Security benefits early we base the reduction on how many months of early checks you'll receive before a full retirement age. So, for those that have a full retirement age of 66, if they're receiving benefits as early as 62, there's potentially 48 checks early or about 25% reduction. So, it's about almost a 0.5% per month. So, an example that I talked about where if you still continue to work and we hold half of your benefits--so you get six full checks and we hold back six checks--by the time you reach full retirement age, you may have only received 24 out of the 48 expected checks. So since we reduced you based on receiving 48 checks, after your full retirement age what we will do is recalculate how many early checks you actually received and then change your reduction. So you don't exactly get all that money that was held back paid out to you right off the bat. But what happens is, your reduction gets lowered. So, in effect, you get a higher or closer to your 100% benefit after we count how many you missed and it can increase the benefit.

A great way to kind of get an idea of how this works, because talking about numbers sometimes gets confusing--and it's also what if you stop working and were in between?What you can do is, when you visit socialsecurity.gov, if you click on our retirement planner or go to socialsecurity.gov/planners, you can access our planners and on our retirement planner we have that annual earnings test calculator, where if you click on it, you put in your date of birth, the expected earnings that you'll have for the calendar year, and then what your Social Security benefit amount will be if you haven't filed yet, if you use retirement estimator, or create a My Social Security account, you can have the Social Security statement online to know what that amount is.

Benz: So, it uses my own information to populate the calculator.

Salata: Right.

Benz: OK. That's helpful.

Salata: And then you get an estimate of what to expect and then that way you have a better idea of knowing what's going to happen if I continue working, how much checks am I going to receive. And then other part about it is though is to remember even though we do give you that change in a reduction factor once you reach your full retirement age to account for all those checks early, one main consideration is you still may end up with the reduction for the rest of your retirement career. So, it's important to think about, do I need those Social Security benefits while I'm still working.

Benz: Right. And then the rules are a little different if in the year of my full retirement age I'm not docked quite as much for my earned income, let's just talk about that.

Salata: With the year you turn your full retirement age for the months prior to when you attain that full retirement age, we have a higher limit. It's $44,880. And then if you earn over that, it's $1 for every $3. The reason we have that is, because you may not have a birthday in January, like I do …

Benz: Might be November.

Salata: Yeah. So, I'll reach my full retirement age at the beginning, or not with these 66 and 2 months or 4 months, it may carry you into later in the year. So, what happens is, for example, for those are turning 66 this year, but say your birthday Aug. 20. What we'll look at is, for the months of January through July, so the month prior to when you turn your full retirement, is that's when you're still restricted on your earnings. But the limit is $44,880 for those seven months. So, in effect, if you're not going to earn over $99,000 or so, you probably won't have $44,880 by end of July, so we can pay you as early as now when you file. But if, say, you're turning 66 in December of this year, now you have 11 months and it's still only $44,880 for those 11 months. So, really the earlier you're reaching your full retirement, the easier or less restrictions you may have on that year.

Benz: OK. So, it's a higher threshold in terms of income in the year in which I attain full retirement age. And then I'm also not docked quite as much for that period, right, it's $1 in $3 that I earn versus the $1 in $2?

Salata: Yes.

Benz: OK. So, a small thing to keep in mind there. The other issue I want to address with you, Andrew, is this idea of taxation of Social Security benefits and how that can be affected by my earned income. Let's talk about that, because that's kind of a separate issue. We're not talking about the benefits themselves being reduced, but we are talking about the taxes that you owe. Let's talk about that.

Salata: Yeah, and that's a very good thing to talk about only because sometimes we get that confusion where individuals may think that our $2 for $1 reduction when you earn over the limit we hold back that $1 for every $2 is a tax, when it's not. It's just that since you're earning over a limit, we have to hold back some of your benefit. In addition to that withholding your Social Security benefits may be subject to taxation, whether you're under the limit or over. What that income threshold is, before your Social Security benefits are taxable, your countable income has to be over $25,000 as a single individual or $32,000 as a married couple filing jointly. So, what that comes out to be is--or how that countable income comes up is--half of your Social Security benefit is counted toward that limit plus what your taxable income is. So, we only use half of your Social Security to get to that. And then if you are over those limits then your benefits can be taxed at half of your Social Security benefits and the more you make, the more of your Social Security benefits are taxable.

Benz: OK. So, for people with a lot of working income or maybe really large portfolios that they are withdrawing from, it's sort of an inevitable that at least a portion of their Social Security benefits will be taxable?

Salata: Yes. So, the taxes may be something that also consider in financial planning part. What we do have on Social Security's website is when you create a My Social Security account, you can always access your 1099 online. So, we send them out as of the end of January. But for those individuals that may have liked it or didn't see it, you can always reprint or get a copy right away by accessing your Social Security account or creating a My Social Security account online and then accessing a replacement 1099. And the 1099s we send have a worksheet on the back to let you know how that countable income is done.

Benz: OK. Lots of moving parts here, but it sounds like you've got lots of great resources. Thank you so much for being here to discuss this with us, Andrew.

Salata: Thank you for the opportunity. We always like to remind individuals that Social Security is with everyone through their life's journeys, securing today and tomorrow for everyone.

Benz: OK. Thank you.

Salata: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.