500,000 US Retirees See Social Security Cheques Cut Each Year Because of This Little-Known Rule

Working in retirement is a growing trend amid rising living costs and looming fears about Social Security fund insolvency in 2032. Many Americans even carry debt into retirement and, at times, rely heavily on Social Security benefits just to get by.

However, half a million social security beneficiaries who claim benefits before the full retirement age and continue to work see their social security benefits garnished considerably every year due to the little-known retirement earnings test (RET).

Retirement experts believe that the retirement test is widely misunderstood. 'When people hear about the RET, they think it's a tax. Then they see their Social Security check go down in size. and they get mad,' LIMRA Retirement Income Institute's Jason Fichtner told a media outlet. 'They're like, "Why is my check getting reduced because I'm working?"'

In 2026, if you claim social security between the age of 62 and the full retirement age of 67, but still working with annual earnings of over $24,480, the Social Security Administration will withold $1 for every $2 you earn over that threshold. However, claiming months before your birth month for full retirement age, the SSA withholds $1 for every $3 you earn over $65,160.

Although the thresholds rise every year based on the average wage index, many beneficiaries still see their monthly incomes being garnished. Note that the RET does not include investment income, retirement accounts, or even annuities.

However, if you made over $70,000 as salary in a year, the formula could wipe out your entire Social Security monthly benefit.

Let's say you are 64 with an $80,000 salary and eligible to receive a $2,800 month Social Security cheque. As per the RET formula, your salary is $55,520 over the $24,480 earnings threshold. So, $27,760 or half of the earnings over the threshold will be withheld from annual social security benefits. Your total estimated annual social security is $33,600, with $27,760 garnished, meaning that the SSA won't send you a cheque for 10 whole months.

Benefits Are Not Lost But Postponed

Withheld Social Security income due to RET is added back to your income when you reach the full retirement age. However, that might not compensate for the years lost in dealing with garnished benefits.

'The word we use is "postponed," because the money doesn't disappear,' T-Rowe Price's Stuart Ritter told a media outlet.

Elsewhere, DRM Wealth Management's David Rae said that 'if you are 62 and working full time, it would be crazy to take Social Security knowing you're going to have [an earnings-test] clawback.'

The retirement earnings test was more stringent during the Great Depression, when the government wanted older adults to exit the workforce to make space for younger people. Back then, Americans couldn't receive Social Security benefits if they earned more than $15 a month.

Sen. Rick Scott, chair of the Senate Aging Committee, has proposed a law to repeal the RET so that older adults who want to work can continue without being 'robbed of their hard-earned benefits.'

However, it is important to understand that repealing the earnings test could probably drive more people to claim Social Security as soon as they become eligible at 62, further mounting pressure on Social Security funds facing risks of insolvency.