Claiming Benefits While You Are Working
A. Some Basic Rules
If you choose to work while receiving Social Security benefits, your benefit amount will be reduced only until you reach your full retirement, which is age 66 for those born between 1943 and 1954. Usually, if you are under full retirement age when you start getting your Social Security payments, $1 in benefits will be deducted for each $2 you earn above the annual limit. For 2014 that limit is $15,480.
However, there is an important exception to the above rule. In the year you reach your full retirement age (66 for most people), $1 in benefits will be deducted for each $3 you earn above a different limit. For 2014, this other limit is $41,400. Further, Social Security only counts earnings before the month you reach your full benefit retirement age. Starting with the month you reach full retirement age you will get your benefits with NO limit on your earnings.
Spousal benefits can be affected by excess earnings in two ways. First, if a spouse works and is under full retirement age, excess earnings will affect spousal benefits in the same fashion as described above (a $1 reduction in spousal benefits for every $2 or $3 in excess earnings, depending on the spouse's age). Excess earnings by a spouse affect spousal benefits only. There is no feedback effect on the primary retiree's benefits
Secondly, spousal benefits are reduced if the primary beneficiary is under full retirement age and has excess earnings. When this situation occurs family benefits are reduced, not just the retiree's benefits. So, family benefits are reduced $1 for every $2 in excess earnings by the retiree ($1 for every $3 in the year before full retirement age). This reduction is prorated across the married couple's benefits.
The benefit reduction due to earnings looks like a tax on earnings. But that image is only partially correct. If some of your retirement benefits or widow(er)'s benefits are withheld because of excessive earnings, your benefits will be increased starting at your full retirement age to take into account those months in which benefits were withheld. If you live into your 80s, you will eventually recover everything that was initially withheld. So, while the benefit reduction may look like a tax on earnings, it is only a temporary tax (provided you live long enough to recover those withheld benefits).
One important instance where the work-related benefit reduction is a true tax is the case of spousal benefits. Spouses do not receive increased benefits at full retirement age if benefits were withheld because of work. In other words, any spousal benefits withheld due to working are lost forever. Note that spousal benefits may be withheld because of excess earnings by the spouse or by the primary beneficiary. In both instances, the withheld benefits are never recovered.
The SSA provides useful information about how work affects your benefits here. Also, the SSA provides a retirement earnings calculator to help you determine how working will affect your benefits.
B. Some Recommendations
Retirees and widow(er)s less than full retirement age.
Since lost benefits lead to higher annual benefits later on, we might simply advise that a retiree or widow should claim whenever they want and, provided they live long enough, they will get back all the withheld benefits. In other words, they can ignore the work-related benefit reductions. But, this statement is too simple.
If a retiree expects to have all benefits withheld because of excess earnings, they probably should wait and claim when excess earnings are no longer an issue. There is no obvious advantage to claiming, and you avoid having to depend on Social Security to make the correct compensation calculations when you reach full retirement age.
If a retiree expects to have all or most benefits withheld for just a year or two, he or she should probably wait and claim when excess earnings are no longer a significant issue. If the retiree claims at 62, they are stuck with age 62 level benefits until full retirement age. If they wait and claim at, say, age 64 (when they have stopped working) they will receive a benefit which will be over 15 percent higher immediately, instead of having to wait for an adjustment at full retirement age.
Spouses less than full retirement age
Excess earnings by a spouse, or by the primary beneficiary, reduce spousal benefits if the spouse's age is less than full retirement age. Moreover, there is no compensatory benefit increase when the spouse reaches full retirement age (as there is with retirement or widow(er)'s benefits). In other words, spousal benefits lost due to excess earnings are lost forever.
Recommendation: if you are eligible for spousal benefits but you or the primary beneficiary want to continue working at a job that generates excess earnings and thus reduces spousal benefits, you should probably wait to claim your spousal benefits until excess earnings fall to zero.
As with most recommendations, there are exceptions to the rule. Here are two such exceptions that might affect your decision making. If you really need your reduced Social Security benefits to live on, then you may choose to collect your reduced benefits now rather than larger benefits later. Secondly, if the benefit reduction from working is "small" (say, a couple of hundred dollars), you may choose to ignore the reduction and, again, collect now rather than later. Keep in mind, however, that for spousal benefits any work-related reduction is permanent.
For additional detail on this case, see our discussion of how working affects spousal benefits.