44 Compensation and Working Conditions Summer 2000

Employee Benefits

THOMAS P. BURKE

Social Security

Earnings Limit

Removed

A new law removes the Social Security earnings

limit for workers aged 65 through 69. The limit

was originally designed to eliminate benefits for

those who earned wages while receiving benefits. The earnings limit has been modified

numerous times. In April, 2000, the limit was

repealed for those aged 65 and beyond; this

article discusses the effect of the new law.

Thomas P. Burke is an economist in the Division of Compensation Data

Analysis and Planning, Bureau of Labor Statistics.

Telephone: (202) 691-6261

E-mail: Burke_T@bls.gov

In April, 2000, President Clinton signed into law the repeal

of an original provision of the 1935 Social Security Act—

the so-called “earnings limit.” In signing the new law, the

President described the changes as follows:

Today, one in four Americans between 65 and 69 has

at least a part-time job. Eighty percent of the baby

boomers say they intend to keep working past age 65....

Yet, because of the Social Security retirement earnings test, the system withholds benefits from over

800,000 older working Americans, and discourages

countless more—no one knows how many—from actually seeking work.... This bill not only means that

our seniors will be able to enjoy extra income and personal fulfillment that comes with work without being

penalized. It means that companies with labor shortages will have a fresh supply of experienced workers.... [I]t will mean more baby boomers working

longer, contributing more to the tax base and to the

Social Security trust fund at precisely the time when

the percentage of younger workers paying into the system will be dropping.1

The Social Security earnings limit was initially designed

to eliminate the monthly Social Security benefit of any retiree who continued to earn wages; by 1940, Congress had

modified the limit to allow recipients to earn up to $14.99 a

month before their benefits were reduced. The provisions

of the earnings limit have subsequently been modified, treating retirees of different ages differently and increasing the

earnings amount above which Social Security benefits are

affected.

This article describes the provisions of the earnings limit

under the former law and the details of the new law.

Former law

Under the earnings limit, Social Security benefits for those

at the normal retirement age (currently age 65) through age

69 were reduced $1 for every $3 that recipients earned above

$17,000 per year.2 Younger recipients, aged 62 to 64, were

subject to a more stringent requirement—Social Security

benefits were reduced $1 for every $2 a worker earned above

$10,080 per year. The dollar amount thresholds for those

between age 65 (normal retirement age) and age 70 ( full

retirement age) were scheduled to increase to $25,000 per

year in 2001 and $30,000 per year in 2002, and to be indexed for inflation thereafter. The limit for workers under

the normal retirement age (age 62 to 65) was indexed annually for inflation. At age 70, recipients were exempt from

the earnings limit. (See table 1 for a history of the earnings

test limits over the last 26 years.)

The earnings test applied, and still applies, only to wage

income (so-called “earned income”); recipients could, and

still can, receive unlimited unearned income, such as interest, dividends, and capital gains, without losing any Social

Security benefits.3

A retiree’s benefits were not the only benefits affected by

the Social Security earnings test. The provisions also applied to benefits of “auxiliary” beneficiaries—spouses or
 Compensation and Working Conditions Summer 2000 45

Social Security Earnings Limit

other dependents whose benefits are based on another income source. For example, a spouse could receive a benefit

equal to 50 percent of the retiree’s benefit. If the retiree’s

benefit was reduced, the spousal benefit also was reduced.

The earnings test was designed to result in only a temporary reduction of Social Security benefits. When benefits

were reduced, or when eligible workers chose to delay their

receipt of benefits beyond the normal retirement age, their

subsequent benefits were increased to account for the delayed benefits. In addition, when a recipient’s benefits were

reduced because of the earnings test, future benefits were

computed based on their new earnings and years of work.

Therefore, future benefits, available when earnings fell below the threshold or at age 70, were increased. In effect, the

earnings test reduced immediate benefits, but in return, provided an increase in future benefits.

Demographic changes

Life expectancy among Americans rose steadily throughout

the 20th century, from 47 years in 1900 to 76 years during

the 1990s.4 This change provided more work years for individuals, and, after the advent of Social Security, more retirement years.

Labor force participation trends track closely with Social

Security age requirements. For example, data from the Current Population Survey5 indicate that there is a decline in the

percent of individuals participating in the labor force when

they reach age 62 (when first eligible for Social Security

benefits) and again at age 65 (normal retirement age for Social Security benefits). 6 (See table 2.)

New law

Congress passed the earnings test repeal, known as the Senior Citizens Freedom to Work Act, by unanimous vote on

April 7, 2000. The law eliminates the earnings test for those

who have reached the Social Security normal retirement age,

currently age 65.7 For those who are receiving Social Security benefits and are under the normal retirement age, benefits will continue to be reduced $1 for every $2 a worker

earns above $10,080 per year (indexed for inflation annually). During the year in which a recipient attains the normal

retirement age, earnings in the month prior to actually attaining that age are subject to a reduction of $1 for every $3

earned above $17,000. (The $17,000 limit increases annually, as described above.) Earnings in or after the month in

which the recipient reaches normal retirement age do not

count toward this limit. Beyond normal retirement age, earnings do not affect Social Security benefits. The new law is

in effect for calendar year 2000 and beyond.

In debating this legislation, the House of Representatives

documented the intent of the new law and the anticipated

impact, as follows:

The purpose of the legislation is to remove work disincentives for seniors who reach full retirement and to

improve the fairness of the Social Security program.

The legislation would have a negligible effect on the

long-term financial status of the Social Security Trust

Funds.... [R]epealing the earnings test will improve

the personal and financial well-being of America’s

senior citizens. As seniors continue to enjoy increased

longevity and better health, they should be allowed to

work as long as they are willing to do so. Studies have

shown that allowing seniors to remain productive in

TABLE 1. Annual exempt amounts under the Social Security

retirement earnings test by recipient’s age, 1975–2000

1975 ........................................... $2,520 $2,520

1976 ........................................... 2,760 2,760

1977 ........................................... 3,000 3,000

1978 ........................................... 3,240 4,000

1979 ........................................... 3,480 4,500

1980 ........................................... 3,720 5,000

1981 ........................................... 4,080 5,500

1982 ........................................... 4,440 6,000

1983 ........................................... 4,920 6,600

1984 ........................................... 5,160 6,960

1985 ........................................... 5,400 7,320

1986 ........................................... 5,760 7,800

1987 ........................................... 6,000 8,160

1988 ........................................... 6,120 8,400

1989 ........................................... 6,480 8,880

1990 ........................................... 6,840 9,360

1991 ........................................... 7,080 9,720

1992 ........................................... 7,440 10,200

1993 ........................................... 7,680 10,560

1994 ........................................... 8,040 11,160

1995 ........................................... 8,160 11,280

1996 ........................................... 8,280 12,500

1997 ........................................... 8,640 13,500

1998 ........................................... 9,120 14,500

1999 ........................................... 9,600 15,500

2000 ........................................... 10,080 217,000

1

 From 1975-82, the higher earnings limit applied to recipients up

to age 71.

2 Beginning in 2000, the higher earnings limit applies to those

months from the beginning of the year until the month the recipient

attains full retirement age. There was no earnings limit beginning

with the month the recipient attains full retirement age (70).

SOURCE: Social Security Administration.

Year Aged 62

through 64

Aged 65

through 691

TABLE 2. Percent of men and women participating in the labor

force by age, 1999

55 .............................................. 82.5 65.9

60 .............................................. 68.4 49.2

61 .............................................. 64.2 43.3

62 .............................................. 52.7 37.7

63 .............................................. 46.8 32.7

64 .............................................. 40.7 30.6

65 .............................................. 35.7 22.3

Age

Labor force participation rate

Men Women
46 Compensation and Working Conditions Summer 2000

retirement has a positive impact on their health and

self-esteem. Moreover, repealing the earnings test

would allow seniors the freedom to work without penalty so they can supplement their Social Security benefits. This is particularly important to many lowerand moderate-income retirees who rely more heavily

1

 Remarks by President Clinton at the bill signing for the Senior Citizens Freedom to Work Act of 2000, April 7, 2000. 2

 Social Security provides full benefits at the “normal retirement age”

and reduced benefits at the “early retirement age.” The normal retirement

age is 65 for those born in or before 1938. For those born after 1938, the

normal retirement age increases gradually to age 67 for those born in 1960

or later. Early retirement benefits are available at age 62, with reductions

in benefits for those years before the normal retirement age in which benefits are received. 3

 For a detailed discussion of the justification for and the arguments

against the “earnings limit,” see Robert J. Myers, Social Security, 4th ed.

(Philadelphia, Pension Research Council Publications, 1993), pp. 470-75. 4 EBRI Data Book on Employee Benefits, 4th ed. (Washington, Employee Benefits Research Institute, 1997), p. 167.

 on earnings from work rather than savings and pensions.8

Social Security Administration actuaries estimate the cost

of repealing the earnings limit to be $23 billion over the next

10 years. However, long-term costs should be negligible, as

taxes paid by older workers will offset increased benefits.9

5

 The Current Population Survey (CPS) is a monthly survey of about

50,000 households conducted by the Census Bureau for the Bureau of

Labor Statistics. The survey has been conducted for more than 50 years. 6

 For an earlier discussion of labor force participation among older

men, see Diane E. Herz, “Work after early retirement: an increasing trend

among men,” Monthly Labor Review, April 1995, pp. 13-20. 7

 Department of Health and Human Services, Public Health Service,

Health, United States, 1994 (Washington, U.S. Government Printing Office, 1995). 8

 Committee on Ways and Means, U.S. House of Representatives,

Report 106-507, Mar. 1, 2000. 9

 For additional information on the impact of the new law, see Elliot

Carlson and Trish Nicholson, “You’ll see more people working,” AARP

Bulletin, April 2000, p. 3.

Compensation and workplace data available on the Internet

The following Internet sites provide overviews, answers to frequently asked questions, and lists of contacts for the Office

of Compensation and Working Conditions surveys and programs. The surveys and programs homepages are:

 Homepage

• Collective Bargaining ........................................................................ http://stats.bls.gov/cbahome.htm

 Collective Bargaining Agreement File

 Work Stoppages

• Employment Cost Trends ................................................................... http://stats.bls.gov/ecthome.htm

 Employment Cost Index

 Employer Costs for Employee Compensation

• National Compensation Survey ......................................................... http://stats.bls.gov/comhome.htm

 Employee Benefits Survey

 Occupational Compensation Survey

• Safety and Health Statistics ............................................................... http://stats.bls.gov/oshhome.htm

 Census of Fatal Occupational Injuries

 Survey of Nonfatal Injuries and Illnesses

Alternatively, the Office of Compensation and Working Conditions Internet site is available at http://stats.bls.gov under the

heading, “Surveys & Programs.”

Program or survey