Millions of Americans opt to claim Social Security benefits while still working, hoping to supplement their income. However, an often-overlooked rule—the earnings test—could significantly reduce their benefits. While these reductions are not permanent, they could impact financial plans for years.
Understanding how early claiming and the earnings test interact is crucial for those planning their retirement strategy. While some workers may expect a steady stream of Social Security payments alongside their salary, they may be surprised to see their benefits withheld. This mechanism affects those who have not yet reached their full retirement age (FRA) and can lead to adjustments later in life.
How the earnings test reduces benefits before full retirement age
Americans can begin claiming Social Security retirement benefits as early as 62, but doing so comes at a cost. Those who claim before their FRA, which is currently 67 for most workers, receive reduced monthly payments. The reduction is 5/9 of 1% per month for up to 36 months before FRA, and 5/12 of 1% per month thereafter. Those claiming at 62 could see a 30% reduction in their benefits.
Beyond this, the earnings test further affects those who work while receiving benefits. In 2025, individuals below their FRA for the entire year will see $1 withheld for every $2 earned over $23,400. For those reaching FRA in 2025, the threshold is higher—$1 withheld for every $3 earned over $62,160. However, once a worker reaches FRA, the earnings test no longer applies, and benefits are paid in full, regardless of income.
For some early claimants, these deductions could mean receiving little to no Social Security income in certain months, depending on their earnings. This can create financial strain for those who anticipated a stable supplement to their salary.
Withheld benefits are restored later—but gradually
Workers who see their Social Security benefits reduced due to the earnings test are not losing that money permanently. Instead, once they reach FRA, the Social Security Administration (SSA) recalculates their benefits. The withheld amounts are factored into a one-time benefit adjustment, which increases their future payments.
While this adjustment compensates for prior withholdings, it does not offer immediate relief to those depending on consistent income before FRA. The higher adjusted benefits continue for life, with additional annual cost-of-living increases. However, for workers managing current expenses, this delayed payback may not align with their financial needs.
To navigate these challenges, tracking annual earnings is essential. By keeping income below the earnings test thresholds, workers can avoid or minimise benefit reductions. This strategy is particularly crucial for those relying on Social Security for essential expenses.
While withheld benefits are eventually restored, the timing of these adjustments could significantly affect financial planning in the years leading up to full retirement.
