Many people misunderstand what happens to Social Security benefits if they go back to work (2024)

In conversations with people preparing to claim Social Security before reaching full retirement age, one subject keeps coming up: the reduction in benefits that happens if they earn too much income.

People seem aware that if they claim Social Security early, they will lose $1 of benefits for every $2 they earn in wage income above a relatively low amount — $22,320 this year.

What I haven't heard mention a single time is, if some Social Security payments are withheld, the money is returned later. It's a crucial detail when deciding when to claim benefits and how much to work.

Basically, if people file early for Social Security and then earn enough money working while retired that their benefits are reduced, their benefits will be recalculated when they reach full retirement age.

In effect, they'll be treated as if they had claimed Social Security benefits later than they did. And that will increase their payments going forward, because the later people claim Social Security, up to age 70, the larger the monthly checks.

Some key points:

• The earnings test only applies to those who retire prior to reaching what Social Security considers full retirement age. For anyone born in 1960 or later, that's 67.
• The special first-year rule: If a person starts collecting Social Security mid-year and before full retirement age, their benefits won't be reduced so long as they don't earn more than $1,860 a month or work more than 45 hours in self-employment, regardless of earnings for the full year.
• In years that follow some benefits would be withheld if their earned income exceeds the maximum allowed. For example, if a person earned $10,000 above the limit, their Social Security benefits would be reduced by $5,000 that year.
• That doesn't mean each monthly payment would be smaller. It means Social Security would withhold entire months of payments until the amount to be withheld is reached.
• The earnings test ends the month a person reaches full retirement age, and in that year the earnings test is different. For the months prior to reaching full retirement age, $1 is deducted from benefits for every $3 earned above an annualized limit, which is currently $59,520.
• At full retirement age, the months that benefits were withheld are essentially added to the age at which a person retired. So, someone who claimed Social Security at 62, and had 12 months of benefits withheld prior to reaching age 67, would be treated as if they retired at age 63.
• The only income that counts toward the earnings test is wage income, or net earnings from self-employment. Income from investments, interest, pensions and annuities aren't counted.

Story continues below

Whew. There are also some special rules for people with overseas income. For more details visit Social Security's website, ssa.gov, where one can find explainers on how this all works, lots of calculators includingoneto figure out how the earnings test will affect benefits, and another that calculates life expectancy.

Tip: Provide the Social Security Administration with earnings estimates, because if benefits aren't withheld,people who earn too much can be asked to repay money they received.

Withheld benefits are later returned in the form of larger Social Security payments. Whether that will make up the difference would depend on how long a person lives.

Social Security gives this example: If someone claims at age 62 and would be due $910 monthly, but ends up having 12 months of benefits withheld because of the earnings test, at full retirement age (now 67) their benefit would be recalculated to $975 monthly.

Not counting inflation, it would take 14 years to recoup the amounts withheld, at which point the retiree would be 81.