The Retirement Earnings Test
Social Security old-age benefits are meant to protect workers from lost earnings due to retirement, not simply to provide a pension to everyone beyond a certain age. Thus, the program includes a provision called the Retirement Earnings Test (RET), which temporarily withholds some retirement benefits from individuals who claim Social Security before their full retirement age (FRA, currently age 67 for those born after 1959) and continue to earn income over a certain threshold.
Once claimants subject to the RET reach their FRA, the Social Security Administration restores their previously withheld benefits by permanently increasing their monthly payments. Thus, over a lifetime, beneficiaries should receive approximately the same amount in total benefits whether they are subject to the RET or not.
Figure 1 shows how the RET works for a hypothetical female beneficiary who claims Social Security at age 62, works until age 65 earning $24,000 a year, and lives to age 86.
Figure 1: Monthly Benefits and Lifetime Totals for Hypothetical Beneficiary Affected by the RET
Source: Social Security Administration, “Program Explainers: Retirement Earnings Test,” June 2015.
Note: Figure 1 does not show cost-of-living adjustments.
The rules of the RET differ depending on how close a beneficiary is to FRA. A beneficiary who is below FRA and will not attain it during the year is subject to a $1 reduction in monthly benefits for every $2 of annual earnings above a certain threshold ($21,240 in 2023). A beneficiary who will reach FRA in the current year is subject to a $1 reduction in benefits for every $3 of annual earnings above a different threshold ($56,520 in 2023). When a beneficiary has benefits fully or partially withheld under the RET, those “lost” benefits are restored starting at FRA through a recomputation.
Unfortunately, the RET can confuse Americans who are planning their retirement, as most people are unaware that the benefit reduction is temporary and that withheld benefits are restored later in retirement. This potentially causes beneficiaries to limit or eliminate their earnings to avoid benefit withholding, leading to “bunching” of labor income just under the threshold amounts. Such labor supply disincentives impede policymakers’ goal of maximizing Americans’ participation in the workforce to help them build more secure retirements. Notably, after Congress repealed the RET for workers between the FRA and age 70 in 2000, bunching under RET thresholds disappeared for that population.
Due to these concerns, some legislators have proposed eliminating the RET entirely, which could facilitate longer careers and greater personal savings.
Repealing the RET would:
- Boost labor force participation among beneficiaries between age 62 and FRA. An analysis of the research on the RET and BPC’s calculations suggest that repealing the RET would result in an additional 200,000 to 800,000 Americans in the labor force by eliminating disincentives to earning. Encouraging older Americans to continue working by eliminating the RET could enhance their retirement security in addition to benefiting the broader labor market.
- Help workers better prepare for retirement. Workers and retirees widely misunderstand the RET, failing to account for both lower benefits early in retirement and higher benefits later. Eliminating the RET would simplify Social Security benefit calculations and retirement planning, enabling workers to make better informed choices about their claiming decision.
- Marginally bolster the solvency of the Social Security trust funds. The SSA Office of the Chief Actuary estimated this reform would close approximately 1% of Social Security’s long-range shortfall.
If Congress elects to keep the RET, SSA could better communicate its impact to Americans by changing the name of the test to “Temporary Benefit Withholding” or something similar. This could reduce confusion about the rule by clarifying that forgone benefits are ultimately returned to beneficiaries.
Complementary Reform Options
Repealing the RET would likely hamper the retirement security of some Americans by inducing them to claim benefits earlier than they would if the RET were in place. The RET, by withholding some benefits before an individual reaches the FRA, makes claiming early less attractive, especially for those who do not realize that their foregone benefits will be restored later. Though based on a misunderstanding, this effect is generally beneficial, as most Americans claim benefits earlier than is optimal and thereby lock in a lower monthly Social Security benefit for the rest of their lives.
Accordingly, policymakers should consider pairing RET repeal with other policy changes that help people optimize their claiming decision, such as:
- Reinstating broad distribution of an improved Social Security Statement. SSA used to mail paper Statements each year to everyone aged 25 or older but no longer does due to budget constraints. These Statements, however, increase knowledge of Social Security’s rules and confidence in the program’s future, make younger Americans more likely to work, and increase the claiming age of older Americans. Mailing the newly redesigned paper Statements to most workers would facilitate deliberate and informed claiming decisions.
- Renaming claiming ages to clarify their true significance. Currently, SSA refers to age 62 (the age at which retirees can first claim Social Security) as the “early eligibility age” and age 67 as the “full retirement age.” “Delayed retirement credits” refer to the monthly benefit increase that beneficiaries can receive if they delay claiming after full retirement age, up to age 70. This nomenclature subtly conveys that earlier claiming is better, with real effects on claiming behavior. Referring to the ages of 62, 67, and 70 instead as, respectively, the minimum benefit age, standard benefit age, and maximum benefit age would improve clarity and likely discourage some individuals from claiming earlier than necessary.
- Enabling retirees to sustainably draw down savings to finance delaying Social Security claiming. Whether through mandatory add-on savings accounts fully integrated with Social Security or options added to defined contribution plans (such as 401(k) plans), such bridge funding would help delink retirement from Social Security claiming, thereby incentivizing delayed claiming and ultimately increasing monthly benefits. A safe harbor could make defined contribution plan sponsors more comfortable educating employees about the importance of the claiming decision and helping them understand their options.
- Encouraging SSA to improve its resources and processes related to the claiming decision. SSA houses a tremendous amount of public information for current workers and retirees through its online resources and direct service, and has myriad opportunities to draw attention to the significant potential costs of claiming benefits too early.
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