Annual retirement test background

How much can I earn and still receive Social Security” has always been a popular topic for questions. The retirement earnings test, also called the annual earnings test, describes how your own employment earnings from gross wages or net self-employment income can reduce Social Security payments to you during the year.

Details about the retirement test for 2014 are in the Social Security retirement planner section and are only indirectly today’s topic.

Today, retirement test restrictions end with the month a person reaches full retirement age (FRA). Starting with the month you reach full retirement age, you can get your benefits with no limit on your earnings. This is a relatively recent change, only taking place in 2000. The retirement test still applies to beneficiaries not yet FRA.

The final version of the Social Security Act of 1935 contained retirement test language, stating that “Whenever the Board finds that any qualified individual has received wages with respect to regular employment after he attained the age of sixty-five, the old-age benefit payable to such individual shall be reduced, for each calendar month in any part of which such regular employment occurred, by an amount equal to one month’s benefit.” Recall that at this time, age 65 was the Social Security retirement age since reduced benefits did not yet exist.

Starting with the 1950 Amendments, the retirement earnings test ended at age 75. From that point on, it was established that the retirement test need not always apply. 

Over years, additional changes were made to the retirement test ending age as well as allowing partial payment depending on how much one earned. Until the 1960 Amendments, earnings over exempt amounts stopped benefits completely with the full benefit withheld when limits were exceeded.

When I started with Social Security, the retirement test applied until age 72. Several years later it eventually went to age 70 as part of the 1977 Amendments. You can read the legislative history of the retirement earnings test here.

So, when did the retirement earnings test end for people at full retirement age?

In his 1999 State of the Union Address, President Bill Clinton stated that the Social Security retirement test should be eliminated. Legislation to do this received unanimous support in both houses of Congress and, on April 7, 2000, “The Senior Citizens’ Freedom to Work Act of 2000″ was signed into law, eliminating the retirement earnings test for beneficiaries at or above full retirement age (FRA) (also called normal retirement age). It still applies to beneficiaries not yet FRA. Remarks of President Clinton during the signing statement are here. In those remarks, President Clinton also introduced the Social Security online retirement planner.

Retirees are used to it now, but ending the annual retirement test at FRA was a historic change in the Social Security retirement program. As noted earlier, from the beginning of Social Security in 1935, retirement benefits had been conditional on the requirement that the beneficiary be substantially retired. For those who have reached full retirement age, “The Senior Citizens’ Freedom to Work Act of 2000″ effectively repealed this requirement.

Retirement test information for 2014 is here.

Special payments after retirement

Q: I retired in 2013 but expect income in 2014 from work done before I retired. Will this lower my 2014 Social Security benefits?

A: For people younger than full retirement age, the Social Security annual earnings test, also called the retirement test, concerns how much can be earned from wages or self-employment in a calendar year without reducing benefits during that year.

Termed a special payment, money received for work done before retirement is not normally included for the earnings test. Income received after retirement is a special payment if the last thing done to earn it was completed before stopping work. Examples could include accumulated vacation or sick pay, bonuses and sales commissions. If self-employed, net income received after the first year you retire is a special payment if you performed the services to earn the payment before becoming entitled to receive Social Security. 

For example, say a person retired at the end of 2013 and started receiving Social Security retirement as of January 2014. In January, the person receives payment from the former employer for unused vacation time. Since this vacation pay was earned before retirement, it is considered a special payment and not counted towards the 2014 annual earnings limit.

Two local occupations often receiving special payments for SSA retirement purposes are insurance salespeople and farmers. Insurance commissions for policies sold before retirement but received after the year of retirement are usually special payments. If a farmer fully harvested and stored a crop before or in the month of entitlement to SSA benefits, and then carried it over for sale in the next year, the income will not affect benefits for the year of sale. Keep documentation related to this.

As always, this is general information.  To learn more, read the SSA publication, Special Payments After Retirement, at www.socialsecurity.gov/pubs/10063.html or contact Social Security.  Annual earnings test information is at www.socialsecurity.gov/retire2/whileworking.htm.

Do you need to update your 2014 earnings estimate?

A question received in the office relates directly to my January 28 post about annual earnings reports and earnings estimates.

The caller, age 64, said that a letter from Social Security stated she would not receive her Social Security retirement benefit for January and part of February due to her estimated 2014 gross wages of about $20,000.

Where, she asked, did that information come from? She retired in 2013 and only expected minimal part-time earnings in 2014.

The estimated earnings amount came directly from her 2013 retirement application. The application asks for a current year and following year estimate from wages and self-employment.

At age 64, she will be younger than her full retirement age (FRA) for all of 2014. Since her estimated earnings for 2014 was above the 2014 annual earnings test amount for her age, Social Security adjusted her benefits payable during 2014 to account for the excess and then resumed monthly payment.

All she needed to do was report her actual earnings for 2013 and provide an accurate estimate of her 2014 gross wages. This was easily completed and, with her new estimate below earnings test limits, benefits could be paid for all months of 2014.

If you received SSA retirement or survivors benefits and were younger than full retirement age (FRA) for at least part of last year, report your 2013 employment earnings if your estimated or actual earnings were more than 2013 earnings test amounts for your age. Amounts for 2013 are in the January 28 post. At the same time, be sure your estimated 2014 earnings are correct based on your current work plans.

Before potentially reducing SSA benefits for 2014 a person younger than their full retirement age (FRA) the entire year could earn $15,480. A person reaching FRA during 2014 could earn $41,400 before reducing their retirement benefits. There is no earnings limit starting with the month you reach full retirement age. Examples of how the annual earnings test is applied are here.

 A special rule exists for people who retire during the year after already earning over annual limits. This one-time rule lets Social Security pay retirement benefits for any whole month that you are considered retired, even when having high earnings prior to retirement.

You can change your 2014 earnings estimate as needed during the year by calling the SSA national toll-free phone number 1-800-772-1213 / TTY 1-800-325-0778 or contacting your local office. Earnings for the annual earnings test include only your own gross wages from employment and net-income from self-employment.

The earnings test does not apply if you receive benefits because you have a disability. In this case, report starting or ending work to Social Security at the time. The earnings test does apply to family members receiving benefits through someone receiving Social Security disability.

Do you need to report your 2013 employment earnings?

Q: I receive Social Security while working part-time. Last year I worked fewer hours and earned less than originally planned. Do I need to tell Social Security that my earnings were less than expected?

A: Perhaps, depending in part on your age and amount of earnings. If you received SSA retirement or survivors benefits and were younger than full retirement age (FRA) for at least part of last year, report your 2013 employment earnings if your estimated or actual earnings were more than 2013 earnings test amounts for your age.  

Before potentially reducing SSA benefits for 2013, a person younger than their full retirement age (FRA) the entire year could earn $15,120. A person reaching FRA during 2013 could earn $40,080 before reducing their retirement benefits. There is no earnings limit starting with the month you reach full retirement age.

A special rule exists for people who retired during the year after already earning over annual limits. This one-time rule lets Social Security pay retirement benefits for any whole month that you are considered retired, even when having high earnings prior to retirement.

Earnings for the annual earnings test include only your own gross wages from employment and net-income from self-employment.

Your estimated earnings amount was used to pay benefits during the year. 

If your 2013 estimate was high, perhaps you are due more from Social Security. If your estimate was low, perhaps you need to return funds.  If needed, report your actual 2013 earnings when you receive your W-2 form or compute your self-employment income. Report by calling the SSA national toll-free number, 1-800-772-1213 (TTY 1-800-325-0778) or your local office.

Are you working in 2014 while receiving Social Security retirement or survivors benefits?Earnings test amounts for 2014 are at http://www.socialsecurity.gov/retire2/whileworking.htm. Examples of how the annual earnings test is applied are there.

Provide an estimated earnings amount to Social Security you are receiving SSA retirement or survivors benefits and expect to earn more than the 2014 amounts for your age. Estimates can be changed during the year as needed.

The earnings test does not apply if you receive benefits because you have a disability. In this case, report starting or ending work to Social Security at the time.

Working & benefits: the 2014 retirement earnings test

The 2014 Social Security cost-of-living adjustment (COLA) changes more than just the amount of monthly benefits received. Another change increases the annual retirement earnings test amounts for 2014. You can earn more in 2014 than in 2013 before benefits are reduced.

The annual retirement earnings test concerns how your own employment earnings in a year affect your Social Security in that year. The earnings test includes only your personal gross wages or net self-employment for the full calendar year. Your other income or the income of a spouse is not applicable.

So, in 2014 how much can you earn before your Social Security benefits for the year are reduced? Amounts depend on your age.

Three annual earnings levels exist, all based on your full retirement age (FRA).  

Earnings test amounts for 2014 are:  

  • If under full retirement age (FRA) for the entire calendar year, $1 in benefits will be deducted for each $2 earned above the 2014 limit of $15,480.
  • If you reach FRA in 2014, $1 in benefits will be deducted from each $3 earned above the 2014 limit of $41,400, but only for earnings before the month you reach FRA.
  • No earnings limit exists starting with the month you reach full retirement age.

Do you plan to start Social Security retirement in 2014? Often people retiring mid-year have already earned over the annual limit for their age. To allow the start of SSA retirement regardless of expected calendar year earnings, there is a special one-time rule based on monthly earnings. This applies for one year, usually the first year of retirement, and lets people receive Social Security for months that they are retired.

For example, a person retiring in 2014, at least age 62 but younger than full retirement age the entire year, can receive Social Security retirement for months that gross wages do not exceed $1,290 even though overall calendar year earnings will be far above retirement test amounts. Similar rules apply for self-employment. 

Learn about the earnings test at www.socialsecurity.gov/retire2/whileworking.htm. As of today, 2014 retirement test amounts were not shown there but these amounts are on a fact sheet of 2014 Social Security changes at http://www.socialsecurity.gov/pressoffice/factsheets/colafacts2014.html.

See www.socialsecurity.gov/retire2/rule.htm for more about the special, one-time, monthly test.

The earnings test does not apply to people receiving Social Security benefits due to their own disability. If receiving benefits due to disability, contact Social Security before working.

Social Security taxable earnings and tax rates for 2014

When you have wages or self-employment income that is covered by Social Security, you pay Social Security payroll taxes each year up to a maximum amount that is set by law. This continues even when a person receives monthly SSA benefits. Taxable amounts have changed frequently over the years, with changes for 2014 announced with cost-of-living adjustment (COLA) information. 

Related to the 2014 cost-of-living-adjustment and the increase in average wages, the maximum amount of earnings subject to Social Security tax is $117,000 in 2014. You will not see a change in Social Security tax paid unless working in 2014 and earning over the 2013 taxable earnings base of $113,700.

Dating back to 1939 legislation, the Federal Insurance Contributions Act (FICA) is the official Internal Revenue Code name for Social Security payroll tax. Whether called FICA or Social Security payroll tax, it is the same thing.

Changes in the yearly maximum taxable earnings amounts from 1937 to 2014 are shown at http://www.socialsecurity.gov/planners/maxtax.htm.

While amounts of maximum taxable earnings have changed frequently, worth mentioning is that the tax rate has stayed the same (see notes at bottom) since 1990. Tax rates from 1937 to 2014 are shown at http://www.socialsecurity.gov/OACT/ProgData/taxRates.html.

The combined tax rate for Social Security and Medicare is 7.65 percent, paid by both employers and employees, and 15.3 percent paid by the self-employed. This tax money helps fund Social Security and Medicare. For 2014, covered wage or self-employment tax rates are:

  • Employers and Employees: the Social Security tax rate is 6.2 percent on earnings to $117,000. The Medicare tax rate is 1.45 percent on all earnings.
  • Self-employed: the Social Security tax rate is 12.4 percent on earnings to $117,000. The Medicare tax rate is 2.9 percent on all earnings..

Medicare payroll tax does not have a maximum taxable base limit. It continues for all applicable wage and self-employment income during the year even after Social Security tax ends.

 If you have more than one job in a year, each employer must withhold Social Security taxes from your wages without regard to what the other employers have withheld. A result is that you may potentially have Social Security taxes withheld that exceed the maximum. You can claim a refund of the overpaid taxes when you file your personal income tax return with the Internal Revenue Service.

Note 1 – Social Security: Temporary economic stimulus legislation reduced the Social Security payroll tax rate paid by employees and self-employed workers by 2 percent in 2011 and 2012. Amounts equal to the tax revenue not received were transferred to Social Security from the General Fund of the Treasury. 

Note 2 – Medicare: As of January 2013 and separate from the payroll tax, individuals with earned income of more than $200,000 ($250,000 for married couples filing joint income taxes) pay an additional 0.9 percent in Medicare taxes.

Social Security announces benefit increase for 2014

This morning the Social Security Administration announced that monthly Social Security and Supplemental Security Income (SSI) benefits for nearly 63 million Americans will increase 1.5 percent in 2014.

The 1.5 percent cost-of-living adjustment (COLA) will begin with benefits that more than 57 million Social Security beneficiaries receive in January 2014. Increased payments to more than 8 million SSI beneficiaries will begin on December 31, 2013.

Read the full press release at http://www.socialsecurity.gov/pressoffice/pr/2014cola-pr.html

A fact sheet detailing specific Social Security and Supplemental Security Income (SSI) changes for 2014 is at http://www.socialsecurity.gov/pressoffice/factsheets/colafacts2014.html. This fact sheet includes the new annual retirement earnings test amounts for 2014 and an updated amount of maximum taxable earnings along with other automatic adjustments related to the cost-of-living adjustment increase.

The Centers for Medicare and Medicaid Services (CMS), announced earlier this week that the standard Medicare Part B premium will remain at $104.90 in 2014, the same as in 2013. The income-related monthly premium rates will also remain the same as they were in 2013. That press release is on the CMS website at http://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-Releases/2013-Press-Releases-Items/2013-10-28.html.

question about the annual earnings test

Q: I will reach age 66 in May 2014. Some friends told me that I could start collecting my full retirement as of January 2014 and still be able to work and make as much money as I can. Is this correct?

A: No. Your friends are wrong for two reasons. First, in January you will still be younger than your full retirement age (FRA) of 66 so a Social Security retirement benefit started then would be reduced for age. Second, the annual earnings test, also called the retirement test, applies until you reach FRA. Starting with the month you reach full retirement age, the earnings test no longer applies and then you can receive SSA retirement with no earnings limit. The earnings test applies for earlier months.

There are three different earnings test levels depending on if you are younger than full retirement age the entire calendar year, reach FRA in the calendar year, and once you attain FRA. Earnings test dollar amounts for 2014 are not known yet. 

Only gross wages or net self-employment income count for the earnings test. Usually the earnings test is based on calendar year earnings but a special one-time rule uses monthly rather than annual earnings. Use of this special rule allows benefit payment in the first year of retirement since people retiring mid-year often have earned over annual earnings limit amounts.

Tell your friends that accurate Social Security information is at www.socialsecurity.gov.  If using a search engine, make sure you go to the office Social Security website.

 

Land rent income; when to start SSA retirement

Q: My main income is from land rent and a part-time job. Will this prevent me from receiving Social Security retirement at age 62 next year? 

A: Land rent is not a concern for Social Security annual earnings test purposes. It will not prevent you from receiving Social Security retirement. Only your own gross wages or net self-employment for the calendar year is considered for the earnings test.  

At age 62, you are younger than full retirement age (FRA) so your part-time earnings might lower the amount of retirement payable depending on how much they are. In 2013, earnings over $15,120 could affect benefits for people younger than FRA the entire year. Earnings test information for 2013 is at www.ssa.gov/retire2/whileworking.htm. Earnings test levels for 2014 are not known yet. 

Keep in mind that you do not need to start Social Security retirement just because you are age 62, even if you are retired. Will you need the SSA income at 62? Compared to waiting until full retirement age (FRA), starting at age 62 leaves your benefit amount permanently reduced, excluding cost-of-living changes, by about 25 percent. In other words, a $1,000 monthly benefit at FRA of age 66 is reduced to $750 at age 62. Since benefits increase a small percentage with each month delayed, totaling about 8 percent annually, until you reach age 70, you could delay starting Social Security in favor of a higher amount in the future.

You could be retired for many years and having a higher SSA benefit might be important in years to come. The SSA Retirement Planner section has calculators and details to consider when making your decision. More items for you to consider are in the SSA publication When to Start Receiving Retirement Benefits in the Retirement Planner section.  

You decide when to start your Social Security retirement. Whatever you decide, you can complete your retirement application online

 

SSA mothers & fathers survivors benefits

Q: What are Social Security mothers and fathers benefits?  

A: These are Social Security survivors benefits paid to a surviving spouse or surviving divorced spouse based on having a child of the deceased in their care.   

Mothers and fathers benefits may be paid to a surviving spouse or surviving divorced spouse regardless of age, if she or he is currently unmarried and has a young child under age 16, or a disabled adult child, of the deceased in their care, and the child is entitled to survivors benefits on that deceased parent’s record.   

For a simple example, use the family of a man dying in his thirties leaving behind a widow of the same age and a young child. Assuming the child is eligible for Social Security survivors benefits from the deceased parents record, then the widow would likely be eligible for SSA mothers benefits, up until the child reaches age 16 if a disability is not involved. 

Since they are based on having an eligible child in care, mothers and fathers survivors benefits are usually paid to young widows and widowers. Amounts are not reduced for age but can be reduced by earnings of the person receiving them in the same way as working while receiving retirement benefits.

Similar benefits are payable to the spouse of a person receiving SSA retirement or disability benefits if children are involved, but not to a former spouse. 

Create your personal my Social Security account to look at your SSA Statement and see estimated family benefit amounts based on your work record. 

Learn more at the Benefits and my Social Security sections of the SSA website, www.socialsecurity.gov.