LegiStorm

Summary:

Under the Social Security Retirement Earnings Test (RET), the monthly benefits of most Social Security beneficiaries who are below full retirement age (FRA)—between 65 and 67, depending on year of birth—are reduced if they have earnings that exceed an annual threshold. In 2019, a beneficiary who is below FRA and will not attain FRA during the year is subject to a $1 reduction in benefits for every $2 of earnings above $17,640. A beneficiary who will attain FRA in 2019 is subject to a $1 reduction in benefits for every $3 of earnings above $46,920. The annual thresholds ($17,640 and $46,920 in 2019) are typically adjusted each year according to national average wage growth. If a beneficiary is affected by the RET, his or her monthly benefit may be reduced, in part or in full, depending on the total applicable reduction. For example, if the total applicable reduction is greater than the beneficiary's monthly benefit amount, no monthly benefit is payable for one or more months. If family members also receive auxiliary benefits based on the beneficiary's work record, the reduction is prorated and applied to all benefits payable on that work record (including benefits paid to spouses who are above FRA). The RET does not apply to Social Security disability beneficiaries, who are subject to separate limitations on earnings. If a beneficiary is affected by the RET, his or her monthly benefit is recomputed, and the dollar amount of the monthly benefit is increased, when he or she attains FRA. This RET feature, which allows beneficiaries to recoup benefits "lost" as a result of the RET, is not widely known or understood. This benefit recomputation at FRA adjusts (lessens) the actuarial reduction for early retirement before FRA that was applied in the initial benefit computation by taking into account months for which benefits were reduced in part or in full under the RET. The RET has been part of the Social Security program, in some form, throughout the program's history. The original rationale for the RET was that, as a social insurance system, Social Security protects workers from certain risks, including the loss of earnings due to retirement. Therefore, benefits should not be paid to workers who demonstrate, through their level of earnings, that they have not "retired." However, that rationale has changed, in part, over time. Specifically, in 2000, the RET was eliminated for those above FRA (it previously affected those above FRA until age 70). Because the RET does not apply to those who claim benefits after they have attained FRA, Social Security benefits become annuitized after FRA. Studies have shown that the RET has significant impacts on individuals' earnings levels via their hours worked. Specifically evidence shows bunching of individual earnings around the RET threshold levels. However, there is little evidence that the RET has an impact on the overall labor force participation rate. When considering a repeal of the RET, research indicates a repeal would have different impacts across the wage spectrum. Specifically, it would likely incentivize the highest earners—whose entire benefits were withheld due to the RET—to decrease work, receive full benefits, and experience an increased income level overall. Research also suggests that a repeal of the RET would lead to earlier benefit claiming and increased poverty rates, especially among women and those aged 80-89. The Social Security Administration's (SSA's) Office of the Chief Actuary (OCACT) estimates that, over the long-range projection period (2019-2093), the elimination of the RET would have a relatively small positive effect on the solvency of the Social Security Trust Funds. This is primarily due to the fact that the increases in permanent early retirement reductions for entitlement at age 62 are projected to outweigh the increases in benefit entitlements.