What Income Reduces Social Security Benefits?

You can collect Social Security benefits if you are still working and earning income. But if you earn more than a certain amount from your work—and haven’t reached your full retirement age—your benefit will be smaller. Here’s a rundown of how earned income can reduce your Social Security benefits.

Working During ‘Retirement’

Remember the days when you could actually retire when you reached a certain age? You could travel, spend time with your grandchildren, and reconnect with your spouse after decades of hard work.

With an increasing number of people unable to save enough to live out their later years in leisure, many are spending retirement working another job, if they retire at all. Of course, some people just enjoy working and want to continue their careers—or do something else that keeps them in the work world—during retirement.

Whatever your motivation, if you keep working after you start receiving Social Security, your eligibility for full benefits gets complicated.

How Social Security Credits Work

Qualifying for Social Security isn’t that difficult. Over the course of your working life, you need 40 credits to be eligible for benefits, which is equal to 10 years of full-time work.

In 2021, you get one credit for each $1,470 of earnings ($1,510 in 2022), up to a maximum of four credits per year.

Social Security calculates your benefit amount based on your earnings over the years, whether you were self-employed or worked for another employer. The more money you earned, the more you paid into Social Security—and the higher your future benefits—up to certain limits. The math is much more complicated than this sounds, but that’s basically how it works.

What Is Full Retirement Age?

For Social Security purposes, your full or “normal” retirement age is between age 65 and 67, depending on the year you were born. If, for example, your full retirement age is 67, you can start taking benefits as early as age 62, but your benefit will be 30% less than if you wait until age 67.

If you can manage without receiving your Social Security benefits at full retirement age, you can wait until age 70. That will give you the maximum benefit each month. There’s no advantage to waiting past age 70 to start collecting benefits.

Social Security Income Limits

About 70 million people are expected to collect some type of Social Security benefit in 2022. The Social Security Administration reported in October 2021 the estimated average monthly retirement benefit will be $1,657. While that regular monthly income helps, it’s usually not enough to cover living expenses. That’s one reason many people are working longer.

If you work, the money you bring home can affect your Social Security benefits—but the specifics depend on your age and how much you earn. Remember that, although your full retirement age might be 67, you can start receiving benefits at 62, even if you’re still working.

But here’s the catch: for the 2021 tax year, if you start benefits prior to full retirement age, you can only earn up to $18,960 ($19,560 for 2022) and still get your full benefits. Once you earn more than the limit, Social Security deducts $1 from your benefits for every $2 you earn.

In the year you reach full retirement age, Social Security becomes more forgiving. If you earn more than $50,520 ($51,960 for 2022) it deducts $1 for every $3 you earn—but only during the months before you reach full retirement age. Once you reach full retirement age, you can earn any amount of money, and it won’t reduce your monthly benefits.

Note, however, that this money is not permanently lost. After you reach full retirement age, Social Security will recalculate your benefit and increase it to account for the benefits that it withheld earlier.

How Does Social Security Know?

You might wonder how the Social Security Administration (SSA) keeps track of your work and your earnings. The answer: It doesn’t. It’s your responsibility to report how much you’ve made.

“The biggest thing to remember if you are working is to notify the Social Security Administration if you’re going to earn wages in excess of the earnings threshold,” says Matt Ahrens, an associate financial advisor at Integrity Advisory Group.

Otherwise, he notes, “They will not be notified of your earnings until you file your taxes the following year. And if you were receiving excess benefits, you can be fined, forced to pay back the excess, or receive lower future benefits.”

Working Outside of the United States

If you retire and work outside the United States, the rules are different. If you are younger than full retirement age, Social Security will reduce your benefits for every month you work more than 45 hours in a job (or self-employment) that’s not subject to U.S. Social Security taxes. That applies regardless of how much money you earn. These rules can get complicated, so you’ll want to contact Social Security for advice on your particular situation.

The Bottom Line

If you paid into Social Security long enough to earn 40 credits and have reached your full retirement age, you can make as much money as you like without having your Social Security benefits reduced. If you start collecting benefits earlier and earn over a certain amount, a portion of your benefits will be withheld. However, once you reach full retirement age, Social Security will recalculate your benefit to make up for the money it withheld earlier.