Why the Social Security Earnings Penalty Should Be Repealed

Policy Backgrounders | Social Security

No. 152
Monday, February 28, 2000
by Bruce Bartlett


Introduction

Retirees drawing Social Security benefits are subject to an earnings test. For those ages 65 through 69, one dollar of benefits is withheld for every three dollars in wage income above $17,000 per year. For those ages 62 through 64, one dollar is withheld for every two dollars earned above $10,080.

"The earnings penalty reduces Social Security benefits by $1 for every $3 of wages."

The Social Security earnings test is among the most unfair and counterproductive policies ever imposed by the federal government. On the one hand, we are continually told that workers have a "right" to Social Security whenever there is a proposal to modify cost of living adjustments. But on the other hand, we take away benefits from many seniors simply because they have chosen to work past the normal retirement age. And historically it has been those most vocal about Social Security rights who have resisted most strenuously any elimination of the earnings test.1

This is a massive injustice. If people have in fact earned their Social Security benefits, then they are entitled to them. No one takes away someone's private pension or annuity if that person continues to work after becoming entitled to benefits. This disparate treatment makes a mockery of the notion that Social Security is an earned benefit that people are entitled to by virtue of long years of work. It makes Social Security equivalent to a welfare program where benefits are rightly withdrawn from people who no longer need them.

"Early retirees lose $1 of benefits for every $2 in wages."

A further element of unfairness results from the fact that the earnings test applies only to wage income. One can receive millions of dollars per year in interest, dividends and capital gains without losing a penny of Social Security benefits. But someone who has invested in human capital rather than financial capital is punished when he or she seeks a return on that investment by continuing to work.


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