Social Security was originally designed to help people replace their employment income after they retired, typically at age 65. But over time, the program has changed, and with reduced benefits now available to most workers starting at age 62, millions of people start collecting Social Security payments while they're still working. There's nothing stopping you from claiming Social Security while you're still collecting a paycheck. However, if you do so before you reach full retirement age -- currently between 66 and 67, depending on the year you were born -- then you may have to give back some or all of the retirement benefits you receive if your income is above a certain limit.
Below, you'll learn what the Social Security income limit is for 2018 and how it changes from year to year. You'll also learn when the income limit applies and when it doesn't. First, though, it's useful to understand what prompted lawmakers to create a Social Security income limit in the first place.
A brief history of Social Security and income limits
The Social Security program began in the 1930s amid economic pressure on millions of Americans during the Great Depression. The Social Security Act became law in 1935 and created a social insurance program that provided a continuing source of income for retired workers who were 65 or older. In 1940, the program started paying monthly benefits not only to retired workers, but also to qualifying family members.
However, the original law made it very clear that for workers to get benefits, they needed to be retired. According to the final language of the 1935 Social Security Act, "Whenever the Board finds that any qualified individual has received wages with respect to regular employment after he attained the age of sixty-five, the old-age benefit payable to such individual shall be reduced, for each calendar month in any part of which such regular employment occurred, by an amount equal to one month's benefit."
This essentially set the original Social Security income limit at zero, and the full monthly benefit was subject to forfeiture even if the amount earned was lower than the Social Security payment.
By 1939, though, lawmakers decided that to honor the idea that Social Security was meant to be a supplemental source of income in old age rather than the primary source, it made sense to allow senior citizens to earn at least a minimal amount without penalty. An amendment made it possible for recipients to earn as much as $15 per month -- about a quarter of the minimum wage at the time -- without triggering the elimination of benefits. Further changes in 1950 eliminated the income limit entirely for those aged 75 or older and boosted the threshold for younger recipients to $50 per month, and subsequent moves reduced the maximum age further and increased the income limit.
In 1960, the nature of the income limit changed. Until then, any work above the limit would trigger the loss of all benefits. But workers and retirees didn't like that provision, so lawmakers replaced it with a more gradual forfeiture provision. Under amendments passed that year, for monthly earnings between $1,200 and $1,500, benefits would be reduced $1 for every $2 in earnings above $1,200. When monthly earnings exceeded $1,500, the full benefit would be lost.
The beginning of Social Security benefits for early retirees
Meanwhile, over time, Social Security's scope expanded. In the early 1960s, Social Security began allowing all workers to start taking benefits at age 62 if they were willing to accept reduced payments in exchange for receiving them earlier than the traditional 65-year-old retirement age. That change dramatically increased the number of working-age Americans who could consider taking Social Security.
After that, subsequent changes to the Social Security laws in the 1970s and 1980s started to make distinctions between the early retirement group of recipients and those who had attained full retirement age. More gradual forfeiture provisions were applied to the older group; namely, they would only forfeit $1 for every $3 in earnings beyond the limit, rather than the $1-for-$2 rate that applies to those who are under full retirement age. The income limits were also tied to inflation, allowing them to rise gradually over time without direct action from Congress.
In 2000, lawmakers effectively repealed the income limits on Social Security benefits for those who had reached full retirement age. The Senior Citizens' Freedom to Work Act of 2000 eliminated the income limit entirely for those aged 65 and older at the time, leaving only those who had elected to receive early benefits subject to the limit.
How the current version of the Social Security income limit works
Currently, the Social Security income limits apply only to beneficiaries who have not yet reached full retirement age. There are two separate earnings tests that the Social Security Administration uses to determine whether and how much someone's benefit will be reduced. One applies to those who will be younger than full retirement age throughout 2018, and another applies to those who started the year younger than that age but hit it at some point during 2018.
If you'll be younger than full retirement age throughout 2018, then the Social Security income limit is $17,040. If you have more than $17,040 in earnings from work during the year, then you'll have to give back a portion of your benefits. The amount you'll forfeit is $1 for every $2 over the $17,040 threshold. So if you earned $20,000 from work during 2018, then your income was $2,960 over the threshold, and you'd forfeit half of that, or $1,480.
Those who reach full retirement age during 2018 have a more generous income limit that results in a lower chance of forfeiting benefits. If your earnings prior to reaching full retirement age are more than $45,360, then you have to give up $1 in benefits for every $3 you earned above that threshold. But once you reach full retirement age, your earnings are unlimited, so you may not have to forfeit any of your benefits even if your total annual earnings are above $45,360 -- if the excess earnings came after you reached full retirement age.
For the purposes of the SSA's earnings test, "income" is defined only as money from your job or from self-employment, including bonuses, commission income, and pay for personal leave. It doesn't include pensions, annuities, investment income, or other retirement benefits.
Special rules for income limits
There are several special rules that apply to the Social Security income limits. One applies to anyone who starts claiming their benefits midyear, and it's easiest to explain through an example. If you turn 62 halfway through the year and immediately claim benefits starting in July, then the income limits only apply to the six months' worth of income you earn after you start receiving Social Security checks. However, the rules force you to prorate the annual limit on a monthly basis. $17,040 divided by 12 is $1,420 per month, so if your earnings from July onward were greater than six months multiplied by $1,420 per month, or $8,520, then you'd have to give back some of the benefits you received.
Another special rule applies if you plan to retire midyear. Even if your earnings would normally cause you to forfeit your benefits for a given month, you can still receive a full Social Security check if you stop earning money during that month. For example, if you earned enough in the first six months of the year to forfeit your entire 12 months' worth of Social Security payments, but then retired at the end of June and stopped earning any income, you can still receive benefits starting in July and continuing through the final six months of the year, because Social Security will consider you to be retired during that period.
Finally, if you work outside the U.S., the income limits don't apply. Instead, if you work more than 45 hours in a given month, then Social Security will withhold your entire benefit check for that month. It doesn't matter how much or how little you earn. This fairly draconian provision is the last remnant of how the initial limitation on earnings applied to the entire Social Security program early in its history.
What happens if you fail the earnings test?
Once the Social Security Administration finds out that your earnings exceed the threshold, it will start applying the appropriate amount of reductions. The SSA prefers that you report your earnings proactively, but because it receives payroll reports from your employer, the agency generally knows fairly quickly whether your earnings have exceeded the income limits. Even for self-employed businesses, income tax forms will contain the net income amounts that the SSA needs to calculate the appropriate reduction.
Exactly how benefit forfeiture works varies from situation to situation. If you inform the SSA of your expected earnings for the year, then the agency can automatically withhold the appropriate number of monthly benefit payments before they're ever sent to you. However, if the SSA only confirms that you have excess earnings after paying you benefits, then either you'll have to pay them back or the SSA will withhold the overpaid amount from future benefit checks.
Lawmakers understood that forfeiting benefits without offsetting that loss whatsoever would be unfair to those who choose to keep working after claiming Social Security, especially those who need to go back to work for financial reasons. Therefore recipients who forfeit benefits will also get an increased benefit later on that will offset the amounts they sacrificed up front.
The way this works is a bit complicated. When you apply the earnings limit, it will determine a dollar amount in benefits that you'll lose. The SSA looks at that amount and figures out how many full months' worth of benefits it represents. For every month of benefits you lose or have to give back, the amount of your monthly benefits once you hit full retirement age is adjusted upward. The adjustment is based on what you would have received had you chosen to get Social Security benefits a month later than you actually did. That's a real benefit, because those who claim benefits early have to accept a reduced monthly amount.
An example shows how this works. Say your full retirement age is 66 but you choose to claim Social Security benefits at age 62. The amount you'd get is equal to 75% of what you'd receive if you'd waited until turning 66. Then assume you keep working until age 66 and have enough earnings that the amount of forfeited Social Security is equal to three months' worth of benefits each year for four years.
In this situation, the total number of months' worth of benefits you gave up was three times four, or 12. But in exchange for losing those 12 months of benefits initially, once you turn 66, you'll be treated as if you'd retired 12 months later, at age 63. That in turn will cause the Social Security Administration to recalculate the amount of your monthly checks, and the result will be an increase thereafter from 75% of your full retirement benefit to 80%. That increase will remain in effect for the rest of your life. The idea is that over time, the higher amount you'll get will offset the money you lost in up-front Social Security benefits.
What if you don't want to forfeit Social Security benefits?
If you don't want to deal with the downsides of violating the Social Security income limits, then there are several things you can do. The simplest way is not to claim early retirement benefits. If you wait until full retirement age before you start receiving Social Security, then it won't matter how much you earn, when you retire, or whether you choose to go back to work at some point. Because the income limits no longer apply to those who are full retirement age or older, waiting until that point to file ensures that you'll never have to worry about them.
Another simple way to avoid running afoul of the income limits is to wait until you've stopped working to claim your Social Security benefits. As the special rule above demonstrates, even if your earnings were higher than the income limits in the year you decide to retire, Social Security will pay you a full benefit check for any month it deems that you're retired. If you only claim benefits for months during which you have zero earnings, you shouldn't lose any money to forfeiture. The only downside of this provision is that if you decide to go back to work again before reaching full retirement age, you'll have to take the income limits into account at that point.
Those who have recently filed for Social Security benefits also have an additional option to consider. For up to 12 months after you start getting benefits, you have the ability to withdraw your Social Security application by using a special form, Form SSA-521. If you file for benefits and then realize that your earnings will be higher than the income limits, resulting in the forfeiture of some or all of your benefits, then withdrawing your application will essentially give you a second chance to decide once and for all when you really want to start getting Social Security payments. You'll have to pay back any benefits you've already received from Social Security, but later on, you'll be treated as if you had never applied in the first place. That generally means your monthly benefit will be higher than it was originally.
Will the Social Security income limits always apply?
At this point, the provisions for the Social Security income limits are fairly rigid, with nothing in place that would automatically change their application. In fact, as the full retirement age gradually rises from 66 to 67 over the next several years, a potentially wider range of recipients in their early and mid-60s could become subject to the provision if they decide to stay in the workforce.
Some lawmakers are still looking to repeal the income limits entirely. A new Senior Citizens' Freedom to Work Act was introduced in 2017, seeking to allow unlimited earnings regardless of age without affecting Social Security benefits. However, it and similar bills in the past have generally failed to gain widespread support.
One challenge of changing the income limits is that the Social Security program is already suffering from financial stresses. Under current projections, the trust funds that help to support Social Security benefit payments are expected to run out of money by the mid-2030s. If that happens, the result may be benefit reductions of more than 20%. Against that backdrop, lawmakers hesitate to consider any new provisions that would potentially increase the amount of benefit payments going out. Unless the government finds a solution to Social Security's financial problems, the odds that the Social Security income limits will be repealed seem minimal.
No one wants to give back the valuable Social Security benefits they've spent a lifetime earning. The Social Security earnings test might seem like a punitive measure designed to hurt those who have to go back to work in their golden years. However, the reality of the earnings test is that it helps to serve the goal of the program, which is to supplement Americans' income during retirement. Understanding the rules that govern the income tests and the resulting forfeiture provisions will show you exactly what you need to do to avoid losing any of the Social Security you've earned.
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