Social Security & Work
             created 1/18/06
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        Is there is a huge penalty if you work while collecting SS below full retirement age? Not really. SS early retirement work policy is usually described as 'You are taxed $1 for every $2 you earn above $12,000/yr', but this is extremely misleading. The money withheld ('taxed') is not lost, just delayed, you get it eventually.  This SS policy is widely misunderstood because it is so poorly documented, and some consider this close to a scandal.

        What is not understood is that when you reach 'full retirement age' (age 65 or a little more) your benefit is recalculated. If prior to full retirement age there were months that SS did not pay you (or withheld any fraction of your benefit) due to excess earnings, in the recalculation  these months are no longer counted as months of early retirement, so at full retirement age your benefit rises.

         For example, suppose you apply to start collect benefits two years before full retirement age, but then you continue working full time. Your benefit is (initially) reduced 13.33% (=24 month x 5/9%/month) for 'early retirement'. At full retirement age your benefit is refigured and now the early retirement reduction (if any) depends not on when you applied to SS, but on the number of months that SS actually paid you. So in our example, if you received no checks prior to full retirement age due to high earnings, then at full retirement age your benefit is adjusted upward to the full retirement benefit.

        It is important to note that the checks received from SS in this example are exactly the same in number and amount as though you had waited two years and applied for SS at your full retirement age. In both cases the checks start at full retirement age and are for the full retirement benefit. For the most part what matters is when you stop working, not when you apply for benefits.
         Information below is raw info about SS and work gathered from many sites online in pretty much random order....
       This acdemic paper is a gold mine of information on SS & work. It complains loudly about how poorly SS had explained the issue, with which I totally agree. The best SS documentation they point to is the one (recently updated) Q&A that I had found.

                The Social Security Earnings Test Revisited:
                    Misinformation, Distortions, and Costs
                            by Hugo Bentez-Silva
                            SUNY-Stony Brook
                                Frank Heiland
                            Florida State University
                            September 1, 2005

--- Any reform needs to take into account the effects and rationale of the Social Security Earnings Test and the Actuarial Adjustment Factor, which are widely misunderstood due to the relatively little attention paid
by policy makers and researchers to the fact that Americans are willing to work while receiving benefits.

    **     emphasize that individuals who claim benefits before the NRA but continue to work, or return to the labor force, can reduce the early retirement penalty by suspending the collection of monthly benefits if they earn above the Earnings Test limit.

      -- by the lack of information given to older Americans regarding the consequences of working while receiving retirement benefits.

        -- unless the Social Security Administration is willing to invest more in informing the public about the fairly complex trade-offs linked to the decision of working while receiving benefits.

        --  We argue that the Earnings Test, as implemented in the current informational environment, is costly and distortionary, and these characteristics are mostly the result of a few features of the system, and the misinformation provided to older Americans regarding the consequences of work while receiving retirement benefits.

        -- We find no compelling reasons to maintain the Earnings Test for those between the early and normal retirement ages, unless the government is willing to invest more time and resources in informing the general public about the complex set of trade-offs involved in the decision to work while claiming benefits

        -- Individuals who claim benefits before the NRA but continue to work or reenter the labor force can reduce the early retirement penalty by suspending benefit payments. The ARF (Actuarial Reduction Factor) (or early retirement reduction factor), in turn, will be increased proportionally to the number of months without benefits, which will increase benefits permanently after the individual reaches the NRA (normal retirement age). This adjustment of the ARF allows those who become beneficiaries before the NRA to partially or completely reverse the financial consequences of their decision, averting being locked-in at the reduced rate.

        -- assuming that the individual continues to receive benefits, her MBA (monthly benefit amount) is permanently reduced.

        -- One less-emphasized feature of the process of benefit reduction due to early retirement is the possibility to reduce the penalty even after initiating the receipt of benefits.

        -- The specifics of this adjustment to the Actuarial Reduction Factor are documented in the Social Security Handbook (SSA-H, §724. Basic reduction formulas, §728. Adjustment of reduction factor at FRA) and in the internal operating manual used by Social Security field employees when processing claims for Social Security benefits (SSA-M, RS00615. Computation of Monthly Benefits Amounts) but may not be well-understood by the retirees.

        -- The Social Security Administration does not use the term Actuarial Reduction Factor in their publications ... . In publications the related concept of “Reduction Factor(s)” (is used).

        -- t is important to note that the adjustment of the ARF is automatic and becomes effective only after reaching the NRA

        -- We note that there are good reasons for claiming benefits before the NRA while continuing to work or expecting a return to work, because having claimed benefits provides a type of insurance. Processing the initial Social Security claim takes up to three months. Reinstating the monthly payments takes around six weeks.

         -- The Earnings Test Limit defines the maximum amount of income from work that a beneficiary who claims benefits before the NRA under OASI may earn while still receiving the “full” MBA. Earnings above the limit are taxed at a rate of 50 percent for beneficiaries between age 62 and the January of the year in which they reach the NRA

        -- Those with earnings above the limit will not receive checks from Social Security for some months and thereby adjust their ARF.    (A beneficiary may receive a partial monthly benefit at the end of the tax year if there are excess earnings that do not completely offset the monthly benefit amount (see SSA-H, §1806))

        -- Individuals have the option of informing Social Security to suspend the monthly benefit payment at any time if they believe they will be making earnings high enough above the Earnings Test.

        -- However, during the first year after claiming benefits, the Social Security Administration performs a monthly test to determine whether the person should receive the monthly check. As a result an early claimer who is not working or earns below the limit in the months after claiming (“grace year”) will receive all monthly benefits even if earnings for that calendar year exceed the Earnings Test Limit due to high earnings before claiming.

        -- After the first year, the test is typically yearly and it depends on
the expected earnings of the individual. Given the scarce documentation of the functioning of the ARF, having earned above the earnings limit, and thus receiving fewer checks, may be a common way for beneficiaries to learn about the possibility of undoing the early retirement penalty.

        -- Among the 1,208,100 individualswho turned 62, 63 or 64 and initiated early retirement benefits in 2003, the most recent year available, 74,500 (6%) saw some or all of their monthly checks withheld due to the Earnings Test in that year

        -- Individuals who claimed benefits early cannot increase the rate at which benefits are paid before reaching the NRA.

        --  Most previous studies have argued that individuals respond to the taxation incentives provided by the Earnings Test but do not take the adjustment of the rate of future benefits into account.

        -- Some anecdotal evidence we have gathered indicates that future retirees have a hard time finding the appropriate information to make truly informed decisions regarding the effects of work after claiming benefits. The information publicly available documents the reduction in benefits associated with claiming before the NRA but pays little
attention to the possibilities of affecting the reduction factor.

        -- In particular, the benefits calculator provided by the Social Security Administration ( does not have any reference to the mechanism that allows individuals to affect their Actuarial Reduction Factor by earning above the Earnings Test after claiming and receiving benefits.

        --Therefore, they are very likely to make their labor supply decisions primarily based on the perceived tax incentive provided by the Earnings Test, overlooking the effect on future benefits via the adjustment of the Actuarial Reduction Factor

        -- The recently updated answer to the question If I retire at 62 but work and lose some benefits, will I lose money? is helpful but not easy to find and incomplete as to the adjustment if benefits are withheld prior to the 36 months before reaching the NRA.

        -- Claim specialists seem to follow the simple strategy of recommending late claiming to those expecting to earn wages sufficiently above the limit. This is the source of some of the distortions we have emphasized, which results in reduced flexibility for older Americans

        -- If Social Security maintains the Earnings Test as it is now, it may consider providing more information to current and future beneficiaries regarding the relationship between benefits and work. Some of the distortions associated with the current implementation of the Earnings Test could be eliminated if the informational asymmetries were addressed

        --The Earnings Test loses its taxation aspect for the average individual who understands the benefit adjustment mechanism and who does not face borrowing constraints.

        --  If individuals realized that they are not necessarily locked into the reduced rate associated with claiming early, those who did not claim before the NRA would on average be more likely to claim early.

        -- Given the distortionary nature of the Earnings Test, which is exacerbated under informational asymmetries, the possibility of its removal needs to be discussed.

        -- Actuarial Reduction Factor is approximately actuarially fair

        -- As we have argued herein, the distortionary impact is in part the result of the lack of information about the Actuarial Adjustment Factor.

        -- Relatively simple steps by the Social Security administration, such as providing proper documentation of this incentive in conjunction with the Earnings Test, would help current and future retirees to make more informed retirement decisions.

        - From our analysis of the current system, we conclude that the interaction between work and Social Security benefits is clearly not perceived as a priority by the Social Security Administration.

        -- the lack of information probably results in suboptimal, and potentially hard-to-reverse decisions.

        -- We believe the government should seriously consider providing more information to current and future beneficiaries regarding the options of increasing the Monthly Benefit Amount even after claiming before the NRA.

        -- SSA-H: Social Security Handbook. Online Version
Benefit reflecting 2005 Earning
        SS recalculates benefits in Mar & Oct to include previous year's SS earnings. Companies have until Oct to report them. Monthly checks will increase to reflect 2005 earnings either in May (March recal) or Dec (Oct recal).  Plus there is a separate payment that (I think) makes any increase retroactive back to Jan.
Grace Year
        The first year you have at least one 'non-service' month is a 'grace year'. A 'non-service' month is a month you do not do not have earnings from employment that are more than the monthly exempt amount (about 1k). In the 'grace year' you receive your full benefit amount for any 'non-service' month, regardless of the amount that your earnings exceed the annual exempt amount (about 54k).   (SS Handbook)
Compensation for Withheld SS payments

        I had been assuming that best time to start SS was at 'full retirement age'  since SS payments become 'fixed', but it is not so simple. There is a compensation mechanism if benefits are lost due to work prior to full retirement age. There is a single vague sentence in my latest SS statement, and a Q&A on the SS website "If I retire at 62 but work and lose some benefits, will I lose money?" "Answer, No".

      1)   "If you lose benefits because of work, your benefit will be increased later to account for the months you didn't receive a benefit before reaching full retirement age." (SS statement)

       2)  " If I retire at 62 but work and lose some benefits, will I lose money? " (Q&A on SS website)
Note Google will not search this out.
                    Questions about Social Security
                      Computation of Benefits
                       Question 9

        One mystery here is why the SS booklet "How Work Affects your Benefits" (Jan 2005) makes no mention of any of any compensation for months when no benefits are paid due to earnings exceeding the earnings limit.

  Question  --- If I take early retirement at age 62 but do not receive all of my benefits because of work, will I always be reduced for age 62?

  Answer --- No.   When a person elects to receive retirement benefits prior to full retirement age, those benefits are reduced. The reduction is based on the number of months that benefits are paid prior to attainment of full retirement age. For example, for people attaining age 62 in 2000, full retirement age is 65 and 2 months. A person retiring at age 62 in July 2000 will have a reduction factor of 38 months. The amount of the reduction is 5/9%  (0.555%) for each of the first 36 months and 5/12% (0.417%) for each additional month. The reduction is computed by multiplying 36 by 5/9% (20%) and 2 by 5/12% (.83%). The total reduction of 20.8% will apply to all benefits, even those after full retirement age.

        SSA refigures the reduction factor in the month full retirement age is attained. At that time, any month for which a benefit was not paid because of the annual earnings test is eliminated from the reduction factor. The new higher benefit is payable for the month of attainment of full retirement age and all subsequent months. In our example, if the person did not receive benefits for a period of 10 months because of the annual earnings test, SSA will recalculate the reduction factor in the month of attainment of age 65 and 2 months. The new reduction factor will be 28 instead of 38. The reduction will be 28 x 5/9% for a total reduction of 15.5%. The higher benefit will be payable beginning with that month.
Starting SS again (8/08)
        You can actually return years of SS payments and start SS again!! Yes, you can. They even have a form for it (Withdrawal of Application). SS is nothing if not flexible. You return all the money they sent you for years (with no inflation correction!), and then start again, but your older now so the checks are larger.

        I learned this amazing fact in the SS column of the Wall St Journal (Aug 16-17, 2008). They discuss the example of a couple now 70 who get 13,250 per month since they started collecting in their early 60's. If they return all the money, they can up their SS checks to 20,693 per month. The Journal quotes a SS official as saying "It's very straightforward". Good luck on trying to get back the taxes you paid on those SS benefits!

        It appears that you can view early SS payments as (sort of) a loan the government is making you that, if you choose,  you can pay back years later with no interest and with inflated dollars! If the actuarial age corrections to SS are reasonable, this seems like it might be a good deal. It would be interesting to see a financial analysis of this.

        The Journal gives this reference: (Case Studies, Double Dip SS). -------------------------------------------------------------------------
SS Online Handbook
728.2 Under what conditions are adjustments of the reduction factor made?  Adjustments are made under the following circumstances:
                ---(A) Your entitlement to retirement insurance benefits began between age 62 and full retirement age, and a work deduction (including a partial deduction) was imposed for any month before FRA (Full Retirement Age).  (SS Online Handbook)

728.3 How is the benefit amount recomputed?

                --- An application is not required for this adjustment. The benefit amount is recomputed by using the reduction formula that was used to compute the original reduced benefit. The appropriate month(s) in (A) through (C) above are then excluded from the benefit reduction factor. (SS Online Handbook)

** Handbook says benefit recalculation is also done for months with 'partial deduction', so months with reduced benefit checks are not a problem.

1822.1 When do you need to file a report of expected earnings?

        If you go to work and expect that your total earnings will be more than the yearly exempt amount (see §1803), you should file a report of expected earnings. This report prevents payment of monthly benefits to you that may have to be returned at the end of the year if, under the earnings test, you were not due all the payments received.

        When you file your expected earnings report, you are encouraged to make a high estimate of earnings for the year. Based on your report, we suspend benefits for the number of months required by your estimate.
Using the above description of the 'work' compensation, let's look at what happens if you start SS at age 62, but continue to work full time exceeding the income limit every month.

        -- Since earned income limit is exceeded every month, no benefits are paid until full retirement age is reached.
        -- Refigured reduction factor upon reaching full retirement age is zero months reduction. So the result is that SS benefits are exactly the same as if SS had been started at full retirement age, i.e. same start time and same benefit per month!

Question ---- What happens when your benefits during a month are reduced by earnings, but not reduced all the way to zero? In other words when SS refigures the reduction factor, do they use fractional months.
** A booklet you receive from SS, after you sign up, has a different and somewhat clearer explanation of the effect of work. Contradicting other references, it says the correction is also for months with partial benefit checks (consistent with handbook).  Note, however, it does not state to what extent the increase at retirement age 'makes up for' the withheld benefit checks.

        “If you are younger than full retirement age and some of your benefits are withheld because your earnings are more than $12,000, there is some good news. When you reach full retirement age, your benefits will be increased to take into account those months in which you received no benefit or reduced benefits.” from  ‘What You Need to Know When You Get Retirement or Survivors Benefits, January 2005’.
Random SS Info
    * CPI Inflation adjustments -- SS benefits are indexed to inflation starting at age 62 even if you are not collecting! In 2004 + 2005 this has resulted in 2.7% +4.1% =6.8% benefit increase.

    *  SS tax on any self-employed consultant pay is 15.3%
                            (employee + employer)

    * Are SS benefits taxable? -- 85% of SS benefit is taxable when total income is above 34k.  Prior to 1984 SS benefits were not subject to federal tax, but in that year the law was changed.

     *  SS actuarial equivalence seems to be about about 13-15 years.
                   -- Monthly adjustment for early retirement is 5/9%/month
                                  ( 0.55%/ month or 6.66% /year )
                    -- Average man on SS dies at age 78 (65 + 13 years)

        * SS pays a month late. Payment for Jan comes at beginning of  Feb.

        * Early retirement formula (exact) -- Reduction percent is 5/9% per month for up to 36 months, then 5/12% per month for additional months. This the percent subtracted from 100% of the 'full retirement benefit' also called PIA (Primary Insurance Benefit).

a) Starting SS at 24 months before full retirement age benefit is reduced relative to 'full retirement benefit' by
                 13.33% = (5/9% x 24 months)

b) Starting SS at age 62 benefit is reduced relative to 'full retirement benefit' when full retirement age is
                    age 65                            20%         = (5/9% x 36 months)
                    age 65+10 months        24.167% = (5/9% x 36 months
                                                                             + 5/12% x 10 months)
                    age 67                            30%          = (5/9% x 36 months
                                                                             + 5/12% x 24 months)

        * Crossover point (Collecting at age 62 vs age 65) --- About 18 years to make up the dollars (age 80), and figuring in the time value of money (@4% interest) adds three more years (age 83).  For full retirement age higher than age 65 the breakpoint climb to a slightly higher age (84 to 85). (Financial Journal article)
Personal assistance
        You may obtain clarification or assistance on Social Security matters at any Social Security office or by calling the Social Security toll-free telephone number
        Each month SS benefits are delayed the benefit goes up 5/9%  (0.555% ), which translates into about a $10 ($9.62) increase for each month delay.
            ...  you may call the Social Security Administration and ask that your benefits be temporarily stopped. You can restart them at any time with another call to Social Security. At the Malden SS office I was told that you do this, not by saying don't pay me, but by changing your earning estimate.

            ... If you increase your work force participation for the balance of this year, the Social Security Administration will recover any overpayment next year. For example, if you earn $1,000 over the limit this year, $500 would be withheld from next year's benefits.

            Should you intend to work at earnings over next year's limit, you should provide the Social Security Administration your best estimate of anticipated 2005 earnings. The Social Security Administration will determine how many months of benefits you would still be entitled to receive. Your benefits will cease as of January and begin again in the month they are due. The same procedure would be followed in each succeeding year. Effective with the month you reach full retirement age, your benefit will be recalculated to remove the early retirement reduction for any month an early retirement benefit was not paid. All future checks will increase. (Ask Mary Jane Early/Late Retirement Archive, National Committee to Preserve Social Security and Medicare)

        If you can turn SS payments  on/off  monthly (with a phone call) then this pretty much solves the problem of 'partial months'. If annual earning are between 12k and 54k, then just turn off SS payments for the appropriate # of months. When you advise SS of next year's expected earnings, they do this automatically.

            ... The amount of a Social Security benefit is determined on an indexed average of the highest 35 years of lifetime earnings.
            SSA's stiff early retirement penalties apply to your benefits throughout your retirement whether you collect a dollar or thousand dollars a month during your early retirement. (book Retire Early-Making Smart choices)
        While not 100% clear, I think the above book is saying be proactive in stopping SS payments when you have earnings, because only months when SS is NOTpaid at all matter when benefit is refigured at full retirement age.
        Every year, we refigure benefits for people who are still working and still paying Social Security taxes. If the money you're making now is higher than the lowest year we used in your original computation, we refigure your benefit and pay you any increase due. This usually happens automatically in October of the year following the year you worked. In other words, you should have received an increase in October 2002 for your 2001 earnings. Internally, we call this process the Automated Earnings Readjustment Operation, or AERO (pronounced "arrow").
someone on Vanguard formum found Q&A too

15. Closest Q of link in reply #11
BuyHiSellHigher| 12-27-03 | 12:55 PM
Q 162

If I take early retirement at age 62 but do not receive all of my benefits because of work, will I always be reduced for age 62?

SSA refigures the reduction factor in the month full retirement age is attained. At that time, any month for which a benefit was not paid because of the annual earnings test is eliminated from the reduction factor. The new higher benefit is payable for the month of attainment of full retirement age and all subsequent months. In our example, if the person did not receive benefits for a period of 10 months because of the annual earnings test, SSA will recalculate the reduction factor in the month of attainment of age 65 and 2 months. The new reduction factor will be 28 instead of 38. The reduction will be 28 x 5/9% for a total reduction of 15.5%. The higher benefit will be payable beginning with that month."

Q 73 & 83 ask if earnings credits can be "purchased". Answer is no. What a bummer. Still no free lunches.
easy to find statements like below that are not correct...
        "You can choose to receive benefits as early as age 62, but your monthly benefit amount will forever be about 20% less than if you waited until full retirement age to start getting the checks." Kiplinger
If you are interested in earning the special credits instead of receiving current benefits you must call the Social Security toll free number at 1-800-772-1213, and notify them that you do not wish to receive your check.
  14. Social Security and Pension Benefits
danielgm| 01-24-06 | 08:44 AM

        Social Security and Pension Benefits are very much like an Immediate Annuity (you normally don't outlive the payments). By delaying receipt of such benefits, you can often increase the amount you receive for the rest of your life.

        BUT - there is one, BIG difference between such Social Security and (most) pension benefits when compared to Immediate Annuities - your sex! All else being equal, a man gets a HIGHER Immediate Annuity payment than a woman. BUT, Social Security and most pensions are the same. In this respect, then, women get more from SS and pensions than men, based on taxes and premuims paid.

references for possible SS post
social security + work + taxable income? Community Watch

See Booglehead book --- page xx

blackbuddy  | 11-11-05| 08:57 AM| Total Replies: 2
does anyone know how much of your income is taxable if you take SS at age 62 and continue to work?


  Replies # 1 - # 2 of 2

1. earnings limits?
Buffett_wannabe| 11-11-05 | 09:14 AM
I presume we are discussing the withholding of benefits below full retirement age when income is above a certain threshold? If so, the SSA has a table here.

If you mean the inclusion of SS benefits in gross income for income tax calculation (which applies to all recipients regardless of age), your best resource is IRS Publication 915.

Best regards,
Craig B.

2. The taxability of SS benefits
danielgm| 11-11-05 | 11:23 AM
has no relationship to age of receipt of benefits. It depends on the total income, nature of income, how much you get in SS benefits. The SS web site has the rules.

More significant, potentially, are the limits on earning income from salaries and wages when you collect at age 62 (up to your "full" retirement age - about 66 now and rising to 67 over the next few years). Above a certain modest amount, you will lose $1 of benefits for each so many dollars you earn. Check the web sit for information.

As a "rule of thimb", it rarely makes sense to start collecting SS benefits before the "full" retirement age if you continue to work. BUT, particular circumstances may be different for you.

Reporting Earnings (3/27/06)

        Usually, we get information on how much you earn during the year from
        - The earnings your employee reports on your W-2; and,
        - self-employment earnings reported on your income tax return

        --- We calculated how much of your benefit payments you will receive this year based on the earnings estimate you gave us when you applied for Social Security or on the most recent estimate you gave us.

        --- About mid-year, we probably will send you a message asking you to estimate your current and next year's earnings.

        --- At any time during the year; if you see that your earnings will be different from what you had estimated, you should call us to revise your estimate.

        If you 're self-employed, income counts when you receive it- not when you earn it. When you work, you should save records of your earnings, such as pay stubs.
SS Glossary
        PIA --- Primary Insurance Amount. The monthly amount payable to a retired worker who begins to receive benefits at full retirement age.

        FRA --- Full Retirement Age.  If born in 1942, it's age 65+10 mon. For me Jan 2008

        ARF --- Actuarial Reduction Factor. This is the internal IRS name for what they call the reduction factor in the benefit calculation.

        MBA -- Monthly benefit amount. A beneficiary's monthly benefit amount is based on the PIA, but may be reduced or increased for various reasons. For aged beneficiaries actuarial reduction applies for receipt before full retirement age.

        AIME --Average Indexed Monthly Earnings. The amount of earnings used in determining the PIA for most workers who attain age 62, become disabled, or die after 1978. A worker's actual past earnings are adjusted by changes in the average wage index, in order to bring them up to their approximately equivalent value at the time of retirement or other eligibility for benefits.

        A worker's 35 highest-earning years are indexed to wage growth, up to the year the worker turns age 60. These wage-indexed annual earnings are then averaged (divided by 35 years), and divided by 12 months, to get a monthly amount. The result is called the Average Indexed Monthly Earnings (AIME). The AIME expresses a worker's lifetime earnings in terms of today's wage levels.

        In my case they run from about 45k in early years rising to 90k in later years with an eyeballed average of 67.5k. So my AIME can be estimated as 35 x 67.5k/35 x12=5.600 (calculator has 6,011)

(updated using downloaded calculator)
PIA Calculation --- Worker's Primary Insurance Amount (PIA) is calculated by applying three separate rates to portions of the AIME.

For those who became eligible in 2003, benefits were based on the following formula:
0.90 * 612 +
0.32 * 3,077  (=3,689 - 612) +
0.15 AIME above 3,689

For my AIME of  6,110 PIA in 2003 calculates to
550.8 + 984.6 + 363.1 =1,898.5
To get my PIA the 2003 number is scaled by the CPI mulitplier for 2004 (2.7%) and 2005 (4.1%)  yielding 2,029

Note, from above an estimated benefit change of including or not including 2005 earning. Including 2005 earnings approx pushes up total indexed earning over 35 years by 45k = (90k - 45k).
So {45,000/(35 * 12)} * 0.15 * 1.068 = 17 dollars a month.