In recent years, there has been an increasing trend of individuals deciding to start collecting Social Security benefits before reaching their full retirement age (FRA), which typically occurs around age 67. At the same time, many of these claimants continue to work and earn an income. This dual status draws important considerations regarding the interaction between earned income and Social Security benefits. Understanding the Social Security Administration's (SSA) rules on earnings limits and benefit reductions is crucial for claimants who want to optimize their income streams.
Earnings Limits and Benefit Reductions Prior to FRA
Suppose a person decides to begin claiming Social Security benefits at age 62, which is the earliest eligibility age for retirement benefits. If this claimant also remains employed and earns income, the SSA enforces an annual earnings cap. For 2026, this threshold stands at $24,480. When earnings exceed this annual limit, Social Security benefits are reduced according to a specific formula: for every $2 earned above $24,480, $1 is deducted from Social Security payments.
To illustrate, imagine a claimant whose monthly Social Security benefit is $2,000, amounting to $24,000 per year. If in a given year the individual earns $34,480 in employment income, this exceeds the earnings limit by $10,000. Applying the SSA formula results in a reduction of $1 in benefits for every $2 over the limit, equating to a $5,000 reduction in Social Security benefits ($10,000 ÷ 2). Consequently, for that calendar year, instead of receiving the full $24,000 in Social Security payments, the claimant would receive $19,000.
The reduction of benefits in this manner may seem like a penalty for continuing to work; however, it is important to emphasize that this withheld amount is not permanently forfeited. Once the individual reaches their FRA, the SSA recalculates the benefit to credit any withheld payments that occurred due to exceeding earnings limits. This recalculation results in an increment to the monthly Social Security benefit, effectively compensating for previously withheld amounts.
Exceptions to Earnings Test Rules
Certain categories of Social Security recipients are exempt from these earnings test reductions. This includes individuals receiving Social Security disability benefits or Supplemental Security Income (SSI) payments. Additionally, those working outside the United States may not be subject to the same earnings limitations. Another important exception involves spouses and survivors who receive Social Security benefits on behalf of minor children or disabled children. For these beneficiaries, any reductions in benefits triggered by earnings prior to FRA do not result in increased benefits upon reaching FRA.
Earnings and Benefit Adjustments in the FRA Year
The year a claimant reaches FRA is governed by a different earnings test rule. Suppose the individual started collecting benefits at age 62 but turns FRA during the calendar year, for example, in June. In this FRA year, there is a higher earnings limit threshold set at $65,160. The SSA applies a graduated reduction during this year: one dollar is deducted from Social Security benefits for every three dollars earned above $65,160 before the claimant’s birthday month.
To clarify, if the FRA birthday falls in June, earnings from January through May are subject to the $65,160 limit. Income that surpasses this limit within those months triggers benefit deductions on a one-for-three basis. However, starting with the month in which the claimant reaches FRA and onwards, they may earn any amount without triggering reductions in Social Security benefits. This represents a lifting of the earnings test for higher earners once FRA is reached.
As with earlier years, benefits withheld during the months before FRA due to exceeding earnings limits are not permanently lost. Upon reaching FRA, the SSA recalculates the benefit to factor in these withheld sums, causing an adjustment that increases the monthly benefit moving forward. This recalculation allows those who continue to work up to and beyond FRA to avoid permanent benefit loss even when surpassing earnings thresholds.
Conclusion
For individuals claiming Social Security benefits prior to reaching full retirement age and who continue working, understanding SSA’s earnings rules is vital. Although excess earnings reduce benefits on a dollar-for-dollar (or partially dollar-for-dollar) basis until FRA, those reductions are recouped through increased benefits once FRA is attained. The year one reaches FRA entails a more favorable earnings limit that relaxes after the birthday month, and exceptions apply to certain recipient categories. Overall, while working and collecting Social Security before FRA involves some temporary benefit withholding, the system recalibrates benefits at FRA to safeguard claimants from permanent loss of income due to earnings.