How Is The Earnings Test Applied?

Jun 28 2016 - 12:00pm

Is it possible the earnings test could actually increase ones life time benefit? Specifically the in the event of someone turning 62 next year and my kids will be 16 and 11. Does the earnings test reduce their benefit if I continue to work or just mine?


The earnings test is applied to benefits payable to all entitled family members. $1 of total benefits is withheld for each $2 of the worker's excess earnings (i.e. earnings above the yearly exempt amount, which is $15,720 in 2016).

I'll give you an example. Say John turns 62 in June this year, and becomes eligible for benefits starting with July, along with his 2 minor children. John's full retirement age benefit amount (PIA) is $2000, but is reduced to $1508 for starting benefits 47 months prior to age 66. His children could individually receive $1000 per month, or one-half of his PIA, but because more than 1 child is entitled, their benefits are reduced to $750 each due to the Social Security family maximum.

So, the total of monthly benefits payable on John's record is $3008 (i.e. $1508+$750+$750). Now, let's say John is continuing to work and earns $51,720 per year. His excess earnings are $36,000 (i.e. $51720-$15720), so $18,000 must be withheld from his 2016 benefits. Since he and his children are only due benefits starting with July, total family benefits payable for 2016 are $18,048 (i.e. $3008 X 6). In this example, Social Security would withhold all benefits except for $48, which would be paid to the 3 entitled family members based on their prorated share.

If the same facts continued in 2017, Social Security would withhold all family benefits for the first 6 months of the year, and pay all family members their full checks for July through December. The additional $48 would again be prorated.

Now, fast forward to when John reaches full retirement age (66). John will be due a recomputation of his benefit amount because he was not paid all of the 47 months of benefits for which his benefit amount was initially reduced. Say he only receives benefits for 18 months between ages 62 and 66. In that case, his benefit amount will be adjusted upward to $1800 per month effective with the month he reaches full retirement age. The adjustment would actually be done sometime after that, possibly as much as 2 years after, but the adjustment would be retroactive and would include the appropriate back pay.

In your case, your children will not be eligible until you file and unless your earnings are low enough to allow some payment under the earnings test. So, a case can certainly be made for you to file for reduced benefits if your earnings are not so high that they eliminate all payments. Whether or not this is optimal depends on many other considerations. If you haven't already done so, you may wish to consider running the maximization software available on this website. It accounts for family benefits and the earnings test, and should enable you to better understand your filing options.

Best, Jerry