Why are Social Security benefits temporarily reduced for earned income before full retirement age?
Keeping in mind that Social Security is insurance designed to help replace a loss, including a loss of income from no longer working, lowering the SS benefits for people who do not have such a loss preserves the insurance principle: pay benefits when there is demonstrated need due to reduced earnings, not when someone is still bringing in significant wages.
In addition, during the Great Depression, there was also a labor-market goal: encouraging older workers to exit the workforce to free up jobs for younger, unemployed people.
Preserving the insurance principle still seems valid although the common understanding of that concept seems lost among both citizens and politicians.
Encouraging workers to leave the workforce is not a 21st century goal.
The Senior Citizens’ Freedom to Work Act was introduced in Congress earlier this year and, if enacted, would allow individuals to receive Social Security benefits without having them reduced for earning income with the elimination of the retirement earnings test.
This bill will get rid of the unfair retirement earnings test so that seniors who want to stay in the workforce can do so without being punished or robbed of their hard-earned benefits,” Sen Scott said during a Senate aging committee hearing in late March.
“Robbed?” Another example of irresponsible political rhetoric. Nobody is robbed. In fact the benefits reduced are returned to the retiree at FRA.
How the Recalculation Works
- Automatic Adjustment at Full Retirement Age: When you reach your FRA, the SSA automatically recalculates your benefit amount. They do this by removing the reduction factor for the specific months that benefits were withheld, effectively crediting you for the months you did not receive a payout.
- Permanent Increase: Your adjusted monthly payout remains higher for the rest of your life to account for the withheld payments.
Annual Earnings Review: The SSA reviews your work record every year. If your continued work results in earnings that are higher than one of the 35 years originally used to compute your benefit, they will refigure your benefit and increase it further. This increase is applied automatically in December of the following year, retroactive to January.
This specific bill has not been evaluated, but similar proposals in the past have and the project impact was:
Short run: Modest acceleration of trust fund depletion due to higher immediate benefit payments.
•Long run: Small net positive or near-neutral effect on solvency, per SSA actuarial scoring of prior versions because future benefit levels would be lower without the make-up adjustment.
The great unknown is how such a change might impact work patterns. Will more people start collecting as age 62 while they continue to work?
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