Retirement & Financial Planning Report

Some beneficiaries tend to set working schedules so they fall just under the threshold.

The Social Security earnings test has an effect on when people start Social Security benefits and their decisions regarding work afterward, and its repeal also would change those decisions, according to a Congressional Research Service analysis.

The CRS report examined proposals to end the test, which is a reduction in an individual’s Social Security payments made when he or she continues to work after benefits begin and earns over an allowable amount ($17,440 in 2019). For every $2 earned over this amount, the individual will give up $1 in benefits between age 62 and their full retirement age (now 66, phasing up after 2020 to 67). In the year people reach your full retirement age, they can earn up to a separate limit ($46,920 in 2019) in the months before they reach their full retirement age with no reduction in benefits; for every $3 earned over that limit in that period, $1 is withheld from benefits. There is no earnings test after full retirement age.

CRS looked at the possible impact on three categories of Social Security beneficiaries: those with earnings below the limit; those affected by the test with the result being decreased monthly benefit payments; and those with earnings high enough as to result in no monthly benefit payment.

In the former group, it noted, beneficiaries tend to set their working schedules so they fall just under the threshold, a pattern called “bunching” that has been documented in various studies. For them, a repeal “is likely to increase the hours worked.” Those with high incomes that eliminate the Social Security benefit entirely meanwhile would be likely to reduce their work since they could then achieve the same level of income without working as much.

“Furthermore, research suggests a repeal is likely to incentivize the early take-up of benefits, which would lead to a higher frequency of permanently reduced benefits due to actuarial reductions for early retirement,” it said. The resulting lower lifetime benefits “would increase the likelihood of poverty incidence for certain groups, especially women and those aged 80-89,” it said.