May 19, 2022

Explaining Social Security’s Earnings Test

The reduction in benefits for some people who collect Social Security while simultaneously working is frequently called a “tax.”

It is not a tax. Under a Social Security rule known as the Retirement Earnings Test (RET), some benefits are withheld if the worker earns above a certain level – $19,560 in 2022 – and has not yet reached his full retirement age under the program. At that age, the government starts paying the deferred benefits back incrementally.

As older workers plot a path to retirement, they should have a clear understanding of this financial impact. But a new study finds they have a poor grasp of the tradeoff that is the central feature of the RET: a smaller monthly check now, while they’re working, in return for a bigger check later.

Failing to understand this concept has real world consequences. Retirement experts encourage boomers to work as much as possible to improve their finances. But someone who doesn’t understand the RET might decide against working more to prevent a perceived benefit cut.

The researchers experimented with how to improve understanding of the RET by showing some 1,000 older workers numerous graphic representations of the financial impact. The best way to illustrate the study’s main finding – that a bar chart emphasizing the shift in benefits from now to later worked best – is to focus here on two pairs of blue bar graphs.

Some workers saw a simple bar graph (below, left) showing that the individual who fully retired at age 62 would receive a $1,000 monthly benefit for life. A second bar graph (below, right) showed a smaller benefit –  about $750 per month – for someone who started Social Security at 62 while he was still working. At 67, his full retirement age, the benefit jumps to about $1,100 when Social Security starts paying back the withheld amount.A second group of workers also saw the simple bar graph (above, left) of the 62-year-old retirees’ stable $1,000 benefit. But the second bar graph (below) illustrated the shift in benefits for a Social Security recipient who is still working. …Learn More