Social Security remains a vital lifeline for many retirees, yet many struggle to make ends meet on their benefits alone. With over half of U.S. adults reporting that Social Security fails to cover their basic needs, and nearly 20% of retirees returning to work, financial planning in retirement has become increasingly critical. However, for those working while receiving Social Security benefits, the retirement earnings test could temporarily reduce monthly payments.
Understanding the Retirement Earnings Test
The retirement earnings test is a rule that applies to people who are:
- Currently receiving Social Security retirement benefits, spousal benefits, or survivors benefits.
- Under their full retirement age (FRA). FRA is typically between 66 and 67, depending on your birth year.
- Earning income from employment (e.g., wages from a job or self-employment).
If you meet all three of these criteria, and your earnings surpass a certain threshold, the SSA will temporarily reduce your monthly benefits. The more you earn over the limit, the larger the reduction in your benefit will be.
How Much Can You Earn Before Your Benefits Are Reduced?
Each year, the Social Security Administration adjusts the earnings test limits—the income levels that determine when your benefits will be reduced. Fortunately for workers in 2025, the income limits will be higher, meaning you can earn more before your benefits are reduced.
2024 vs. 2025 Income Limits
Here’s a comparison of the income limits for 2024 and 2025:
| Situation | 2024 Limit | 2025 Limit | Reduction |
|---|---|---|---|
| If you are under FRA | $22,320/year | $23,400/year | $1 for every $2 over the limit |
| If you reach FRA in 2025 | $59,520/year | $62,160/year | $1 for every $3 over the limit |
What Does This Mean for You?
- If you’re under FRA in 2025, the new threshold means you can earn up to $23,400 without seeing any reduction in your Social Security benefits. If your income exceeds that limit, $1 will be withheld for every $2 you earn over the limit.
- If you’re approaching your FRA in 2025, the threshold for reducing your benefits is higher: $62,160. In this case, $1 will be withheld for every $3 you earn over the limit. For someone who is 66 years old and will reach FRA in 2025, your monthly payments would be reduced if you earn more than $59,520 in the months leading up to your FRA in 2025. However, if your income is below the new limit of $62,160, you won’t face reductions.
Example Scenario: Impact of the Earnings Test on Benefits
Let’s walk through an example to illustrate how the retirement earnings test works:
Say you are 66 years old and plan to reach your FRA in 2025. In the months leading up to your FRA, you earn $60,000 in 2025. In 2024, that income would have been over the $59,520 limit, and you would have faced a reduction in your monthly Social Security payments.
But starting in 2025, your income of $60,000 would be below the new threshold of $62,160. As a result, your benefits would no longer be reduced, assuming you continue earning at that level.
Will Reduced Benefits Be Lost Forever?
The short answer is no—while the reductions can impact your cash flow in the short term, they are temporary. Once you reach your FRA, the Social Security Administration will recalculate your benefit amount to reflect the amount that was temporarily withheld due to your earnings. This means that the reductions will essentially boost your benefits once you reach your FRA.
In essence, while the earnings test can temporarily reduce your Social Security payments, the withheld amount is not lost. Once you reach FRA, the SSA adjusts your benefit amount to compensate for those reductions, resulting in larger monthly checks for the rest of your retirement.
For example, if you had a significant portion of your benefits withheld due to high earnings, your new monthly payment will be higher than it would have been had you not worked at all.
The Good News: Higher Earnings Limits in 2025
The higher income limits in 2025 are beneficial for retirees who want or need to keep working but are worried about losing part of their Social Security payments. With the new limits, you can earn more money without worrying about reductions. This change provides more flexibility for those who are still working and want to maximize their retirement income.
However, it’s important to remember that while the higher earnings limits allow for more income before reductions occur, the reductions themselves do not impact your long-term retirement benefits. They are only a short-term inconvenience.
Making the Most of Social Security Benefits
For retirees, Social Security is one of the primary ways to ensure financial stability, but it is essential to understand how it works when you continue to earn income. By staying informed about the earnings test and annual income limits, you can strategically plan your retirement. Whether you decide to work part-time, full-time, or simply focus on managing your benefits, staying up to date on these rules can help you avoid surprises and ensure that your benefits remain as stable as possible.
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