A 2003 Social Security Administration study of the impact of Social Security on the baby-boomer generation (those born from 1946 to 1984) indicates that, "Similar to current retirees, Social Security will account for about two-fifths of the projected family income at age 67 and will be received by almost all baby-boomer retirees." With Social Security income projected to represent a significant portion of average retirement income, it is not surprising people want to know what types of income might affect their benefits and how other income may impact their Social Security payments.
Identifying Earned Income
Only earned income from wages as an employee or self-employed worker's net income will affect Social Security retirement benefits. Bond and bank certificate of deposit (CD) interest, stock dividends, capital gains from the sale of securities, annuity payments or retirement plan income from IRAs, 401k plans and pensions are all examples of unearned income, which does not affect Social Security retirement income (SSRI). For early retirees, high earned income can dramatically reduce or even eliminate their Social Security benefits.
Initial Year of Working and SSRI
A worker who retires early at age 62 can still earn up to $14,160 and collect all of his SSRI at the time of publication. During the initial retirement year, exceeding the earnings threshold prior to receiving his first monthly retirement benefits will not reduce his monthly payments for the balance of that first year, provided he earns no more than $1,180 per month, the monthly equivalent of the annual limit, for the rest of the year. However, he will forfeit a monthly payment for any month his earnings exceed the monthly limit that year.
Earnings Affect on SSRI after Initial Year
After the first benefit year, monthly checks will be reduced $1 for every $2 of earnings over the annual threshold of $14,160 for the years up to the calendar year the worker reaches full retirement age. At full retirement age, earnings limits are increased to $37,680, and at that point, every $3 of excess earnings will lower Social Security income by $1. The Social Security Administration (SSA) adjusts benefits higher at full retirement age to account for payments withheld in prior years as a result of excess earnings.
How Unearned Income Affects SSRI
The amount of unearned taxable income a retiree receives may determine whether 50 percent or 85 percent of his Social Security income will be taxable. To make this calculation, all taxable income, not just earned income, must be added together with one-half of Social Security income plus tax-free interest. Unearned income can come from annuities, pensions, retirement plan distributions, dividends, interest and other sources. At the time of publication, single tax filers with incomes over $25,000 but less than $34,000 will be subject to having up to 50 percent of their Social Security income taxed. The same is true for joint tax filers earning between $32,000 and $44,000. Incomes above these levels will raise maximum tax exposure for Social Security income to 85 percent.
- Social Security Administration: How Work Affects Your Benefits
- U.S. Social Security Administration; Office of Policy; The Changing Impact of Social Security on Retirement Income in the United States; Barbara A. Butrica, etal.; 2003/2004
- IRS; Publication 915; Social Security and Equivalent Railroad Retirement Benefits