Social Security warning as retirement rule could reduce benefits for Americans

Future retirees are being urged to familiarise themselves with certain retirement rules or risk losing vital Social Security benefits.

A Social Security Advisory Board (SSAB) report is reminding older Americans of why it is important to understand the Retirement Earnings Test.

RET impacts those who are approaching the full retirement age (FRA) who are working but still claiming Social Security.

When workers reach the age of 62, they are entitled to claim their retirement entitlement, albeit at a reduced rate.

The SSAB’s study found that 20 to 50 per cent of Americans approaching retirement are unaware that accessing Social Security early could reduce their benefit payments.

Furthermore, 30 to 40 per cent do not know that this reduction is only temporary and monthly benefits will increase, adjusting at FRA to account for months of withheld benefits.

What is the Retirement Earnings Test?

This test determines how much a Social Security beneficiary will get in benefits if they still earn an income.

For every $2 someone earns over a certain threshold, their earnings will be reduced by $1 by the Social Security Administration (SSA).

This year, the SAA reports that the retirement earnings threshold if someone has not reached the FRA comes to $22,230.

When someone hits the FRA of 67 in 2024, that threshold jumps to $59,520 in the months before they hit this age. For the month someone turns the FRA, there is no earnings limit.

Why is the Retirement Earnings Test important?

Once people reach 62, many chose to access Social Security and work at the same time to make more money but there are consequences to doing so.

Notably, it is vital to have an understanding that an early Social Security claimant will not get full benefits.

Due to the test, older Americans need to be conscious that they only get their full benefits once they cross the FRA threshold, no matter if they work or not.

Furthermore, Social Security was created as a substitute to workers’ wages so benefits will be paid at a lesser rate if beneficiaries are still in work.

A concern raised by the SSAB report was the fact that Social Security field office staff often do not alert claimants to this rule.

This is worrying as many older Americans re-enter the workforce to bolster their income and could end up falling foul of the RET.

What happens if someone misunderstands the test?

If someone does not full understand RET, this results in those approaching retirement delaying collecting benefits until the hit the full retirement age.

While this may be beneficial for some, the Bipartisan Policy Center’s senior economic analyst Emerson Sprick told CNBC that the public should not be misled.

Sprick noted that the earnings test will not change the total lifetime benefits most individual taxpayers will receive.