Don't Let Social Security Cost You Tens of Thousands of Dollars in Lifetime Earnings
Social Security's Earnings Test is Public Policy at Its Most Malevolent. It Recklessly Endangers the Financial Welfare of Early "Retirees," With No Gain to the Government.
This article appeared today in Next Avenue.
Next Avenue is an extraordinary online publication with all manner of important information for people at all ages, but particularly those near or in retirement. I reproduce below the article I published today in Next Avenue on Social Security’s diabolical Earnings Test. Please share this post with everyone you need. Every American is at risk of losing tens to hundreds of thousands of dollars because they don’t understand that, for almost everyone, the Earnings Test represents a massive tax on working in one’s early to mid Sixties that’s not for real because, for mot people, its fully rebated starting at full retirement age.
An Economist Takes on the Social Security Earnings Test
What is the impact on older adults? Millions of dollars, he says.
Social Security's Earnings Test tops my list for our government's most senseless and personally financially destructive policy. The Earnings Test is a massive tax that isn't. It's a tax that's levied and then secretly returned making no money on balance for the government (as measured on an actuarial present value basis). Its sole purpose is to con Social Security beneficiaries below age 67 into thinking that earning money beyond a di minimis amount will come at a huge loss in current net income as well as lifetime benefits.
Here's how Social Security describes the Earnings Test. This text appeared in a letter I received in December, 2022. The letter, which announced the system's 2023 COLA (Cost-of-Living Adjustment) was, I presume, sent to each of Social Security's 70 million beneficiaries:
Working and Getting Social Security at the Same Time
You can work and still get Social Security benefits. If you are at full retirement age or older, you may keep all your benefits no matter how much you earn ... If you are younger than full retirement age at any time in 2023, there is a limit to how much you can earn before we reduce your benefits ...
The 2023 earnings limit for people under full retirement age all year is $21,240. We deduct $1 from your benefits in 2023 for each $2 you earn over $21,240.
The 2023 earnings limit for people reaching full retirement age in $56,520. We deduct $1 from your benefits in 2023 for each $3 you earn over $56,520 until the month you reach full retirement age.
An Outdated ARF Formula
That's the entire description. There is no mention that benefits lost to the Earnings Test are fully restored at full retirement age (FRA) in the form of an inflation-adjusted, permanently higher benefit level. This tax rebate is called the Adjustment of the Reduction Factor (ARF). This rebate is meant to leave those hit by the Earnings Test with the same average lifetime benefits calculated on an actuarial present value basis. Actually, the ARF overcompensates for the tax. Why? Because the ARF formula was established years ago when mortality and interest rates were higher.
The ARF formula was established years ago when mortality and interest rates were higher.
The ARF's title is arcane. That's no accident. It was chosen to keep beneficiaries from learning that the Earnings Test tax, paid in the form of reduced benefits received, would be rebated. The term "benefit reduction" is, itself, tricky. If you take any of Social Security's benefits early — before your full retirement age — they are reduced in light of the fact that you'll receive more payments over the rest of your life than if you wait.
Recommended
3 Keys to Claiming Social Security Wisely | Social Security
What to know before starting your Social Security retirement benefits
But the Earnings Test's "reduced benefits" represent an additional reduction that kicks in if you not only take benefits early, but earn, prior to full retirement age, more than the Earnings Test's relevant threshold. Indeed, the Earnings Test's benefit reduction can be large enough to wipe out all benefits you'd otherwise receive in the years prior to reaching full retirement age. Those lost benefits would be lost for good were it not for the ARF.
Why is Social Security Maintaining Its Con Job?
The Earnings Test and ARF were part of Social Security's original design. The ostensible goal of the Earnings Test was to keep able-bodied people from taking benefits. i.e., Those who can work don't need to collect!
For early beneficiaries aware of the ARF as well as the Earnings Test, the policy comes down to reducing such beneficiaries' short-term cash flows.
But the system's architects didn't want to lower lifetime benefits of working beneficiaries. To prevent this outcome, they included the ARF. But in combination, the two provisions simply change the timing — the cash flows — of a working beneficiary's net benefits, giving them lower (if not zero) benefits before FRA and higher benefits thereafter.
Hence, for early beneficiaries aware of the ARF as well as the Earnings Test, the policy comes down to reducing such beneficiaries' short-term cash flows. But ARF-aware early beneficiaries who go back to work aren't likely to be severely cash-flow constrained since they are earning money. Hence, the policy devolved into lying by omission — intentionally not informing early beneficiaries about the ARF. Ostensibly, this would dissuade most abled-bodied older adults who could work from taking benefits.
As for those who took benefits anyway, "Well, too bad if they were dissuaded from working. They are trying to collect benefits when they can still earn money. Shame on them. Let's make earning more than peanuts appear worthless and con them into not working. But if they work anyway, they must be desperate, so let's secretly compensate them for lost benefits."
Those who know the precise twisted logic underlying the con job's origination are long dead. But by imposing and maintaining the con for decades, Social Security's has led tens of millions of early beneficiaries to falsely believe that earning more than a pittance is a fool's errand.
Yes, Social Security will give you that information. best, Larry
Great analysis of a dilemma with Social Security. But I believe I have found another punitive sexist discriminatory action on the part Social Security. Looking at two workers -- let's work on the assumption that both have forty (40) quarters of earned social security -- and have paid in the same exact amount. Person A was a Federal Employee covered under the "old" Federal Retirement system (CSRS) and whose 40 quarters of SS payments were made AFTER leaving Federal Service. He also receives a Federal Pension based upon his contribution to the CSRS Program -- and the Government's Promised amount. Person A's wife did not work throughout her life -- a stay at home mom and caregiver for aged family members. Person B worked only for commercial activities paying to SS. Person B's wife also did not work, and also a stay at home mom and caregiver for aged family members.
At Full Retirement Age Person A's SS is REDUCED under what is referred to as the WINDFALL ELIMINATION PROVISION.
At Full Retirement Age Person B receives a full SS Payment.
So, I understand the reduction for person A.
But the crux of the matter is -- the amount the SPOUSES receive.
Both spouses are the same age -- say full retirement age under SS.
Because Person A's amount of SS Payment is reduced his wife's amount is ALSO Reduced.
Person B's Wife's amount is the full entitled amount without a reduction.
So, my hypothesis is - -as a woman, the two equivalent spouses -- females in this case -- are inequitably treated PURELY because of who they were married to where their husbands' were employed.
In this day and age of equity -- it appears that some women are treated unfairly -- again!
I would appreciate hearing Mr. Kotlikoff's reasoning as to why Wife A receives less than Wife B.
Thanking you in advance!