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As many Americans approach retirement, a little-known rule could quietly reduce their Social Security benefits-especially if they continue working. Now, lawmakers are aiming to repeal this provision, known as the Social Security “earnings test,” which temporarily reduces benefits for those who claim early Social Security while still earning income.
Understanding the Earnings Test
The earnings test applies to individuals claiming Social Security before reaching full retirement age, which typically falls between 66 and 67 depending on your birth year. If you earn above a set threshold-$24,480 in 2026 for those under full retirement age-your benefits are reduced.
Specifically, $1 is withheld for every $2 earned over the limit. During the year you reach full retirement age, the threshold jumps to $65,160, and the reduction softens to $1 withheld for every $3 over the limit.
Once you hit full retirement age, earnings no longer affect your benefits.
Why Some Call It a “Hidden Tax”
Though this rule doesn’t permanently take away your benefits, it can feel like a penalty. Rachel Greszler, a senior policy researcher, described it as a “50% tax” on earnings above the threshold during a recent congressional hearing. The frustration stems from seeing benefits withheld after years of paying into the system.
The Catch: Benefits Are Eventually Restored
Importantly, benefits withheld due to the earnings test aren’t lost forever. Once you reach full retirement age, Social Security recalculates your benefits and gradually repays the withheld amounts through increased monthly payments. However, critics worry that some retirees-especially those who claim early and may have shorter life expectancies-might not live long enough to recoup those reductions fully.
Proposed Changes in Congress
A new bill introduced by Rep. Greg Murphy and supported by Sen.
Rick Scott seeks to eliminate the earnings test altogether. This change would allow early Social Security claimants to continue working without any reduction in benefits tied to their income, removing a significant financial disincentive for older workers.
With more Americans working into their 60s and beyond-nearly 20% of those 65 and older remain in the labor force-the original purpose of the earnings test, which dates back to the Great Depression, seems less relevant today. As Sen. Scott noted, the test was designed to encourage older workers to step aside for younger ones, a concern that no longer aligns with current workforce trends.
Financial Implications
Repealing the earnings test would likely boost monthly income for early claimants who continue working, potentially adding thousands of dollars annually for those earning above current thresholds. However, there’s a downside: removing the earnings test might encourage more people to claim benefits earlier, which leads to permanently lower monthly payments over the long term. Research from the Congressional Research Service warns this could increase financial strain later in retirement, particularly for women and older seniors.
Impact on Social Security Funding
Interestingly, eliminating the earnings test would have a minimal effect on Social Security’s overall financial health. Estimates suggest it might slightly improve the program’s funding outlook, reducing its projected shortfall by about 1% starting in 2028.
What Retirees Should Keep in Mind
If you’re nearing retirement and still working, the earnings test is a crucial consideration in deciding when to claim Social Security. While early claiming combined with work income may reduce benefits temporarily, those reductions are eventually adjusted after full retirement age. If the earnings test is repealed, this decision could become simpler, but the core question of when to claim will still depend on your financial needs, health, and retirement goals.
Bottom Line
Congress is weighing a change that could bring more flexibility-and potentially higher income-to early Social Security claimants who keep working. But it also carries the risk of encouraging earlier claiming that reduces lifetime benefits. Until any new law passes, understanding how the earnings test affects your benefits remains essential for effective retirement planning.
Smart Money Moves for Every Stage
Regardless of where you stand financially, there are always ways to improve your financial health:
- Increase Your Income: Explore side hustles that fit alongside a full-time job or find ways to keep more of your paycheck.
- Grow Your Savings: Time and compound interest are powerful allies. Knowing your financial picture and working with a professional can help you reach your retirement goals sooner.
- Maximize Opportunities: Take advantage of senior discounts and money-saving deals, like shopping around for affordable car insurance.
At the same time, avoid hidden expenses that quietly chip away at your budget.
By staying informed and proactive, you can build a stronger financial future no matter your age.