Social Security Earnings Test Limited to Early Retirees

Earlier this month, President Clinton signed the Senior Citizens’ Freedom to Work Act of 2000 (P.L. 106-182), a law that had received unanimous Congressional support. This new law allows people who are covered by Social Security to receive their full benefits, once they reach Social Security normal retirement age, regardless of how much they work and earn. Although popularly referred to as the “repeal of the Social Security Earnings Test,” in fact, the test remains in effect, but it only applies to Social Security recipients who have not yet reached normal retirement age.

Social Security normal retirement age ranges from 65 to 67, depending on when the person was born. People can retire with reduced Social Security benefits starting at age 62, but if they do so and then earn more than a given amount their benefits will be reduced. Until enactment of this new law, that was the case for all Social Security recipients under age 70.

The change is effective as of January 1, 2000. Here is how the earnings test now works, as explained on the Social Security Administration’s retirement benefits Web site:

• If you are under full retirement age (currently age 65) when you start getting your Social Security payments, $1 in benefits will be deducted for each $2 you earn above the annual limit. For 2000, that limit is $10,080.
• In the year you turn full retirement age, $1 in benefits will be deducted for each $3 you earn above a different limit, but only counting earnings before the month you reach the full benefit retirement age. For 2000, this other limit is $17,000.
• Starting with the month you reach full retirement age, you will get your benefits with no limit on your earnings. These new rules apply for the entire year of 2000, starting back in January.

The Social Security Administration’s retirement benefits Web site gives examples of how the earnings test works now, along with other useful information on Social Security retirement benefits, such as calculators to help current workers estimate their future Social Security benefits.

Note: plans that link their benefit-suspension rules to the Social Security earnings test will need to find a different benchmark or otherwise revise their suspension regime. To the extent the new law affects a retirement plan’s rules and operations, the plan sponsor should, of course, rely on its attorney for legal advice.

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