Limits on Income While Receiving Social Security Benefits

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Social Security provides monthly income to 50.7 million beneficiaries, including over 7.2 million disabled recipients. Historically, Social Security was designed to replace earnings lost due to disability and retirement. Social Security benefits are not limited to those with low incomes. However, the Social Security Act does contain provisions that offset benefits when recipients receive other income or benefits that duplicate the purpose of Social Security benefits.

Retirement Earnings Test

Full retirement age is currently age 66 for workers born in 1943 through 1954; 66 and some months for those born between 1955 and 1960; and 67 for those born in 1960 and later. Once you reach full retirement age, wages or net profits from self-employment do not affect Social Security benefits. However, Social Security imposes earnings limits on workers who retire earlier.

Beginning with the earliest year of possible retirement at age 62, Social Security deducts $1 for every $2 earned over the limit, which is $14,640 in 2012. A special rule applies in the first retirement year. For example, a worker turning age 62 in July may have already earned over $14,160. For one year only, the retiree receives benefits for only months in which gross earnings do not exceed $1,220. Monthly tests do not apply after the first year. The earnings limit changes to $38,880 in the year the retiree reaches full retirement age. Earnings affect only the months prior to her birthday. For example, a worker who turns 66 in July can have gross earnings of $38,880 January through June and still receive all benefits beginning in July. The Social Security Administration deducts $1 for every $3 earned above the limit from benefits due for the first six months of the year.

Any amounts that are deducted from full benefits during the early retirement period are added back to the benefits paid after the worker reaches full retirement age.

Workers' Compensation

Workers' compensation benefits for job-related impairments and some state public disability benefits may offset Social Security disability insurance. The offset amount varies with the size of the workers' compensation or public disability benefits and the worker’s highest average earnings. Social Security reduces its benefits so that total income from Social Security Disability Insurance, workers' compensation and public disability benefits do not exceed 80 percent of the worker’s highest year of average earnings. The offset applies even if the workers' compensation is a lump sum settlement. The Social Security Administration converts the lump sum to a monthly rate for offset purposes. However, if the state paying the workers' compensation or public disability benefit deducts Social Security from its benefits, the SSA does not apply an offset. Only 16 states have these reverse-offset rules. States are no longer allowed to enact reverse offset rules for their benefits, effective 1981, due to Public Law 97-35 enacted by Congress. Social Security does not offset any part of the workers' compensation settlement designated for medical or legal costs.

Government Pension Offset

The government pension offset affects individuals who receive Social Security as the spouse, widow, widower or divorced spouse of an individual who receives a government pension. The government pension offset for workers with a pension eligibility date of July 1983 or later is two-thirds of the pension, meaning that Social Security benefits are reduced by two-thirds of the pension benefit.

For example, if a retiree's government pension is $900, and her Social Security benefit is $800, two-thirds of the pension, or $600, reduces the amount of Social Security payable to $200. The offset does not apply to government pensions earned under a system that participated in Social Security, or to government pensions received as the survivor or dependent of a government employee.