Many Pre-Retirees Don’t Understand This Key Social Security Rule

Somewhere between 25% and 50% of pre-retirees do not realize that working and collecting Social Security at the same time sometimes results in a reduction of benefits, according to a recent report.

What is known as the “retirement earnings test” is “poorly understood by the public,” according to a report from the Social Security Advisory Board, an independent federal agency.

In a nutshell, the retirement earnings test applies to people who have not yet reached full retirement age and continue to work after also filing for their Social Security benefits. Workers in this situation may see their benefits withheld or reduced if their earned income rises above a specific threshold.

The Social Security Administration explains exactly how this works on its webpage “Exempt Amounts Under the Earnings Test.”

While this lowering of the benefit amount can be painful in the short term, it is important to note that it is only temporary. Once a worker reaches full retirement age, the amount is increased to account for the period when benefits were withheld or reduced.

Even here, a lot of confusion reigns. Among those who are aware of the potential for withheld or reduced benefits, just 30% to 40% realize that the benefit will later be adjusted to make up for the lowering that took place previously.

Understanding how the retirement earnings test works — and its potential impact on your benefits — is important.

More than half of retirees either work part-time or return to work before permanently leaving the workforce, according to the advisory board.

Among those who return to work, half report that they were receiving Social Security retirement benefits before they went back to a job. Of these folks, 40% had not yet reached full retirement age when they returned to work.

For more on important Social Security rules, check out:

• “7 Social Security Rules That Married Couples Need To Know“
• “7 Social Security Rules Everyone Should Know by Now“