NCPA - National Center for Policy Analysis

Social Security's Punitive Earnings Cap

May 3, 2001

Last year, Congress voted to end the Social Security earnings limit for seniors age 65 and older. Before that repeal, those seniors could earn up to $17,000 a year without penalty. But for every $3 they earned above $17,000 they forfeited $1 in Social Security benefits -- in effect a 33 percent marginal tax rate.

Experts warn that the caps still in place for retirees 62 through 64 are far more punitive. And early retirees limit the time they work in order to escape the consequences.

  • An early retiree in the 15 percent tax bracket would have to pay a 15.3 percent payroll tax in addition to the 50 percent earnings penalty -- for a total marginal tax rate of 80.3 percent.
  • An early retiree in the 39.6 percent tax bracket -- with a 15.3 percent payroll tax and a 50 percent earnings penalty -- would face a total marginal tax rate of 104.9 percent.
  • As a result, about 85 percent of early retirees ages 62 through 64 opted to keep their earned income close to or below the earnings limit in 1997.

Experts say it is easy to understand why early retirees limit their work under these conditions. According to their tax bracket, they could easily lose more than a dollar for each dollar they earned above the $10,680 threshold.

Source: Rep. Pete Sessions (R-Texas) and Merrill Matthews Jr. (American Conservative Network), "No More Earnings Caps," Washington Times, May 3, 2001.


Browse more articles on Tax and Spending Issues