Social Security Q&A: Would Switching to Non-Covered Employment Exempt Me from the Earnings Test?Commentary by Laurence Kotlikoff
August 16, 2014
Social Security may be your largest or one of your largest assets. How you manage it, by deciding which benefits to collect and when, can make an absolutely huge difference to your lifetime benefits. And those with the highest past covered earnings have the most to gain from maximizing their Social Security.
I’ve been answering questions and writing columns about Social Security each week for the past two years on PBS NEWSHOUR’s website. The editors at Forbes asked me to post a Q&A each day from those columns. To see all my columns, please go to my software company’s site, www.maximizemysocialsecurity.com, and click More Press below the WSJ quote.
Today’s question is about whether moving from covered to non-covered employment after 62 but before FRA would mean that the earnings test (ET) would not be applied to earnings from the new job. It also points to the adjustment of the reduction factor (ARF) that will counteract reductions to your retirement benefits that you didn’t receive because of the ET.
Question: I am 62 years old and have worked and contributed to Social Security for over 35 years. I have applied for employment at a state university, whose website tells me that it does not participate in Social Security. If I accept employment with them and opt to start collecting my Social Security benefits when I turn 63, will the income limit of $15,000 still apply? Since I would no longer be contributing to Social Security, my benefits would not increase beyond what was in my fund when I stopped working for my previous employer in October, right?
Answer: The earnings test would still apply even though you are working in non-covered employment. The Social Security Act of 1935 made retirement a criterion for receiving benefits. The country was, of course, in the middle of its Great Depression and the goal of this aspect of the legislation was to get people to retire and, thereby, free up jobs for the unemployed. Over time, the government realized that the economy doesn’t produce a fixed number of jobs and getting people to retire early wasn’t a smart move, either for the people involved or for the economy.
Today’s earnings test applies only through full retirement age, and any months of retirement benefits you lose due to the earnings test prior to full retirement age are compensated by providing you larger benefits starting at full retirement age. This occurs through what’s called the “adjustment of the reduction factor.” However, not all benefits received based on your earnings record will be readjusted at full retirement age to make up for their being lost due to the earnings test. Specifically, child and spousal benefits, while being subject to their earnings test, will not be incremented at full retirement.