Social Security Retirement Earnings Test: How Earnings Affect Benefits
Released: 2012-01-04T00:00:00

Introduction

Social Security benefits received before a person attains full retirement age (FRA) are subject to an actuarial reduction for early retirement and also may be reduced by the Social Security Retirement Earnings Test (RET) if the beneficiary has earnings that exceed an annual threshold. Under the RET, a beneficiary who is below FRA and will not attain FRA during the calendar year is subject to a $1 reduction in benefits for each $2 of earnings above an annual exempt amount, which is $14,640 in 2012. During the calendar year in which a beneficiary attains FRA, he or she is subject to a $1 reduction in benefits for each $3 of earnings above a higher annual exempt amount, which is $38,880 in 2012.

This report explains how the RET is applied under current law and provides detailed benefit examples to show how the RET affects both the worker beneficiary and any family members (auxiliary beneficiaries) who receive benefits based on the worker beneficiary's record. The report points out features of the RET that are not widely known or understood, such as the recomputation of benefits when a beneficiary attains FRA to adjust (increase) benefits to take into account months for which no benefit or a partial benefit was paid as a result of the RET. Finally, the report discusses policy issues related to the RET, including recent research on the effect of the RET on work effort and the decision to claim Social Security benefits.

Key points discussed in the report include the following:

Benefits may be reduced in part or in full for one or more months as a result of the RET. Benefit reductions under the RET apply both to the worker beneficiary and to any family members (auxiliary beneficiaries) who receive benefits based on the worker beneficiary's record. This would include, for example, a dependent child and a spouse who may have already attained FRA. When a worker beneficiary and family members are subject to a benefit reduction under the RET, the reduction is pro-rated and applied to each person's benefit in proportion to each person's original entitlement amount. (The total amount of the reduction remains the same, but the reduction is pro-rated across more people.) An auxiliary beneficiary may be subject to a reduction in benefits under the RET both on the basis of the worker beneficiary's earnings above the exempt amount and on the basis of his or her own earnings above the exempt amount. Benefits "lost" as a result of the RET may be recouped by the beneficiary. When a beneficiary attains FRA and is no longer subject to the RET, his or her benefits are adjusted upward to take into account months for which no benefit or a partial benefit was paid as a result of the RET. The Social Security Administration (SSA) estimates that elimination of the RET for individuals aged 62 or older would have no major effect on Social Security's projected long-range financial outlook. In the short run, however, SSA estimates that eliminating the RET would have a negative effect on the Social Security trust fund in the amount of $81 billion from 2012 to 2018. The RET raises several policy issues, including the effect of the RET on labor supply (how many hours to work and when to retire) and its effect on when workers claim Social Security benefits.

Historical Background

In general, Social Security benefits are meant to replace, in part, earnings lost to an individual or family because of retirement, disability, or death. The rationale for the RET was outlined in the 1935 report of the Committee on Economic Security, which recommended that no benefits be paid before a person had "retired from gainful employment."

The original Social Security Act barred payment of benefits for any month in which a beneficiary received wages from "regular employment." This provision never went into effect, however, because the Social Security Board and many other analysts thought it would be nearly impossible to determine what was "regular" employment in different industries and occupations. Instead, the board recommended a specific monetary amount to simplify administration. In 1939, Congress incorporated these recommendations in amendments to the Social Security Act. Starting with the first benefits paid in 1940, benefits were withheld for months in which covered earnings were $15 or more.

The RET has evolved from a monthly test to an annual one (with the exception of the "grace year" as discussed below) and from a provision that initially affected all worker beneficiaries to one that affects beneficiaries who are below the FRA. The most recent legislative change to the RET was in 2000 when Congress eliminated the RET for beneficiaries beginning with the month they attain FRA. This change was made under the Senior Citizens Freedom to Work Act ( P.L. 106-182 ). Before the change in 2000, the RET applied to beneficiaries until they attained the age of 70.

Current Law

Social Security Worker and Auxiliary Benefits

Social Security benefits are based on the average of a worker's highest 35 years of earnings. A worker's primary insurance amount (PIA) is computed by applying the Social Security benefit formula to the worker's career-average, wage-indexed earnings. The benefit formula replaces a higher percentage of the pre-retirement earnings of workers with low career-average earnings than for workers with high career-average earnings.

A worker's initial monthly benefit is equal to the worker's PIA if he or she begins receiving benefits at FRA. A worker's initial monthly benefit will be less than his or her PIA if the worker begins receiving benefits before FRA, and it will be greater than his or her PIA if the worker begins receiving benefits after FRA. For a more detailed explanation of the Social Security benefit computation and the actuarial adjustment to benefits claimed before or after FRA, see Appendix A .

Social Security also provides auxiliary benefits to eligible family members of a retired, disabled or deceased worker. Benefits payable to family members are equal to a specified percentage of the worker's PIA. For example, a spouse's benefit is equal to 50% of the worker's PIA, and a widow(er)'s benefit is equal to 100% of the deceased worker's PIA. The total amount of benefits payable to a family based on a retired or deceased worker's record is capped by the maximum family benefit amount, which varies from 150% to 188% of the retired or deceased worker's PIA. For more information on auxiliary benefits and the maximum family benefit amount, see Appendix B .

The RET Applies to Beneficiaries Below the Social Security Full Retirement Age

The RET applies to beneficiaries who are below the Social Security FRA and have earnings that exceed a specified dollar amount (an annual exempt amount). The RET does not apply to worker beneficiaries who are at or above FRA (the RET no longer applies beginning with the month the beneficiary attains FRA) or to those who are disabled. In addition, the RET does not apply to beneficiaries living outside the United States whose work is not covered by the U.S Social Security system; in this case, the "foreign work test" is applied. Self-employed persons are subject to the RET if they have performed "substantial services," which are determined by the nature of the service performed rather than by profit or loss.

The RET Reduces Social Security Benefits

For beneficiaries who are below FRA and will not attain FRA during the calendar year, Social Security benefits are reduced by $1 for each $2 earned above the exempt amount. For beneficiaries who will attain FRA during the calendar year, Social Security benefits are reduced by $1 for each $3 earned above the exempt amount.

Earnings above the exempt amount are charged against monthly benefits beginning with the first chargeable month of the year, at the applicable rate of $1 for each $2 or $3 of earnings above the exempt amount, and continue to be charged each month until all earnings above the exempt amount have been charged against the worker's benefits and any benefits payable to family members on his or her work record. A partial benefit is paid when the charge to a given month is less than the monthly benefit.

The RET Exempt Amounts

The RET applies only to wage and salary income (i.e., earnings from work). It does not apply to income from pensions, rents, dividends, interest, and other types of "unearned" income.

The RET annual exempt amounts in 2012 are $14,640 for beneficiaries who are below FRA and will not attain FRA in 2012, and $38,880 for beneficiaries who will attain FRA in 2012. The RET exempt amounts generally increase each year at the same rate as average wages in the economy. Appendix C shows the annual exempt amounts under the RET from calendar years 2000 to 2012.

Grace Year

A "grace year" applies during the first year of benefit entitlement (or, for dependent beneficiaries, in the last year of benefit entitlement). During the grace year, the RET is applied effectively on a monthly basis. A beneficiary may receive full benefits for any month during which his or her earnings do not exceed one-twelfth of the annual exempt amount, regardless of the total amount of earnings for the year.

As an example, consider a worker aged 62 who (1) has $60,000 in earnings from January through June 2012, (2) claims Social Security retirement benefits on July 1, 2012, and (3) has no additional earnings for the remainder of the year (July through December 2012). Because this person does not have earnings above the 2012 monthly exempt amount of $1,220 in any month from July through December 2012, full benefits are paid for each month of the second half of the year. This is the case even though this person's total earnings for 2012 are $60,000, an amount higher than the 2012 annual exempt amount of $14,640.

The RET May Affect Social Security Benefits Received by Spouses, Survivors and Other Dependents

There are two ways in which a person who receives Social Security auxiliary benefits (benefits paid to spouses, survivors, and other dependents) could be affected by the RET. First, benefits paid to spouses and dependents are affected by the RET when the benefits are based on the record of a worker beneficiary who is subject to the RET (i.e., the worker beneficiary is below FRA and has earnings above the exempt amount). This includes benefits paid to spouses who are below FRA as well as to those who are above FRA. An exception is made for auxiliary benefits paid to divorced spouses. If a divorced spouse has been divorced from the worker beneficiary for at least two years, the auxiliary benefit is not affected by the worker beneficiary's earnings.

Second, benefits paid to spouses (including divorced spouses) and dependents are affected by the RET when the auxiliary beneficiary is below FRA and has his or her own earnings above the exempt amount. Auxiliary beneficiaries are subject to the same annual exempt amounts and benefit reduction rates that apply to worker beneficiaries.

Dually Entitled Beneficiaries

A person receiving spousal benefits who is affected by the RET based on his or her own earnings above the exempt amount may be simultaneously (dually) entitled to a retired-worker benefit based on his or her own work record. A dually entitled beneficiary receives his or her own retired-worker benefit first, plus any spousal benefit remaining after the spousal benefit is reduced based on the retired-worker benefit. In effect, the total benefit payable to a dually entitled beneficiary is capped at the higher of the retired-worker benefit and the spousal benefit.

In the case of a dually entitled beneficiary, his or her own earnings above the exempt amount affect both his or her own retired-worker benefit and the spousal benefit. In addition, if the worker beneficiary on whose record the spousal benefit is based has earnings above the exempt amount, the spousal benefit is affected by those earnings as well. When a dually entitled beneficiary attains FRA, each benefit that was affected by the RET (the retired-worker benefit or the spousal benefit) is adjusted upward to take into account months for which no benefit or a partial benefit was paid as a result of the RET.

An example is provided later in the report to show how benefits paid to a non-working spouse are affected when the worker beneficiary has earnings above the exempt amount. In addition, an example is provided to show how spousal benefits are affected when both the worker beneficiary and the spouse have earnings above the exempt amount.

Benefits Withheld Under the RET are Restored Starting at FRA

When a beneficiary has had benefits fully or partially withheld under the RET, benefits "lost" as a result of the RET are restored starting at FRA. Specifically, the worker's benefits are recomputed—and increased—when he or she attains FRA. In the benefit recomputation at FRA, the actuarial reduction for benefit entitlement before FRA that was applied in the initial benefit computation is adjusted (the actuarial reduction for early retirement is lessened) to reflect the number of months the worker received no benefit or a partial benefit as a result of the RET.

In the initial benefit computation, retirement benefits are reduced for early retirement by a fraction of the worker's PIA for each month of entitlement before FRA. Retirement benefits are reduced by five-ninths of 1% (or 0.0056) of the worker's PIA for each of the first 36 months of entitlement before FRA. Stated another way, the actuarial reduction for early retirement is about 6.7% per year for the first three years of entitlement before FRA (i.e., from the age of 62 to 65). For each additional month of entitlement before FRA (up to 24 months), retirement benefits are reduced by five-twelfths of 1% (or 0.0042) of the worker's PIA, for an actuarial reduction of 5% per year (i.e., from the age of 65 to 67).

Stated generally, if a worker's benefits are reduced in the initial benefit computation to reflect x months of early retirement, and the worker subsequently has benefits withheld under the RET for y months , the benefit recomputation at FRA will reflect an actuarial reduction for x minus y months of early retirement, resulting in a higher monthly benefit amount starting at FRA.

As an example, consider a worker who starts receiving Social Security retirement benefits at the age of 62, although his or her FRA is 66, and he or she has earnings above the RET exempt amount. Because the person claims retirement benefits four years before attaining FRA and has earnings above the RET threshold, he or she will be subject to both the actuarial reduction for benefit entitlement before FRA and benefit withholding under the RET. The actuarial reduction is equal to about 6.7% per year for the first three years of benefit entitlement before FRA and 5% per year thereafter. In this example, the total actuarial reduction in the person's initial monthly benefit is 25% ((6.7% * 3 years) + (5% * 1 year)). In addition, the person continues to work throughout the four-year period from the age of 62 to 66 and has earnings high enough to cause a reduction in his or her monthly benefit under the RET. If the RET results in a 50% reduction in Social Security benefits in each of the four years from the age of 62 to 66, the person would have benefits withheld for six months each year, for a total of 24 months. The benefit recomputation when the person attains FRA will take into account that the person received no benefits for 24 months as a result of the RET. Specifically, the reduction factor for benefit entitlement before FRA will be adjusted from 48 months to 24 months. Starting at FRA, the person's monthly benefit will be increased to reflect an actuarial reduction for benefit entitlement before FRA of about 13.4% (6.7% * 2 years), instead of 25%. The person receives a higher monthly benefit because benefits withheld under the RET are restored starting at FRA.

If spousal benefits are withheld under the RET (as discussed in section " The RET May Affect Social Security Benefits Received by Spouses, Survivors and Other Dependents "), they will be adjusted upward when the spouse attains FRA (not when the worker beneficiary attains FRA). For a spouse who has already attained FRA, there is no subsequent adjustment to benefits to take into account months for which no benefit or a partial benefit was paid as a result of the RET.

Worker Beneficiaries with Earnings in 2006

Table 1 shows the number of worker beneficiaries who had earnings in 2006, the most recent year for which data are available. About 1.3 million worker beneficiaries who were below FRA during all or part of 2006 had earnings.

With respect to the data shown in Table 1 , it is important to note that not all worker beneficiaries with earnings are affected by the RET. For example, those who have earnings below the exempt amount are not affected by the RET. In addition, those who are in the first year of entitlement may benefit from the "grace year" provision and are not subject to the RET during any months in which they have earnings that are lower than the monthly RET exempt amount (i.e., the annual RET exempt amount divided by 12).

Application of the Retirement Earnings Test

Table 2 illustrates the application of the RET to a single person who receives benefits based on his or her own work record. The table illustrates the effect of the RET on single worker beneficiaries in two different age groups, reflecting the application of different annual exempt amounts and benefit reduction rates under the RET for beneficiaries who will remain below FRA throughout the calendar year and beneficiaries who will attain FRA during the calendar year. The two single worker beneficiaries in the examples have the following characteristics:

Single Worker Beneficiary Who is Below FRA Throughout the Calendar Year . This example shows a worker beneficiary with a monthly benefit amount of $2,000 (this amount has already been adjusted for retirement before FRA) and $40,000 of earnings in 2012. Because this worker beneficiary is below FRA throughout the calendar year, he or she is subject to a $1 reduction in benefits for each $2 of earnings above the annual exempt amount of $14,640 in 2012.

Single Worker Beneficiary Who Will Attain FRA During the Calendar Year . This example shows a worker beneficiary with a monthly benefit amount of $2,000 (this amount has already been adjusted for retirement before FRA) and $40,000 of earnings in 2012. Because this worker beneficiary will attain FRA during the calendar year, he or she is subject to a $1 reduction in benefits for each $3 of earnings above the annual exempt amount of $38,880 in 2012.

As discussed above, certain auxiliary benefits (benefits paid to the worker's family members such as a spouse or children) are subject to withholding under the RET if either the worker beneficiary or the auxiliary beneficiary has earnings above the exempt amount. When the worker beneficiary has earnings above the exempt amount, these earnings are charged against the total family benefit, that is, the total of benefits paid to the worker beneficiary and auxiliary beneficiaries who receive benefits based on the worker beneficiary's record. (When the auxiliary beneficiary has earnings above the exempt amount, these earnings are charged only against the auxiliary beneficiary's benefit, as discussed below.)

Table 3 provides an example of a worker beneficiary who is entitled to a monthly retirement benefit of $2,000 (this amount has already been adjusted for retirement before FRA). In addition, the worker beneficiary's spouse and child are each entitled to a monthly auxiliary benefit of $1,000 based on the worker beneficiary's record. Therefore, the total monthly family benefit is $4,000.

If the worker beneficiary is below FRA and has earnings above the exempt amount, reductions under the RET are pro-rated among family members in proportion to each family member's original entitlement amount, before any adjustment for the family maximum or for retirement before FRA. The total amount of the reduction remains the same, but the reduction is pro-rated across two or more people. If reductions under the RET are large enough to exceed the total family benefit for one or more months, no benefits are payable to the family for those months. If a partial benefit is payable for a given month, reflecting a reduction under the RET for that month that is less than the total family benefit, the partial benefit is pro-rated among family members.

In Table 3 , benefits for the illustrative family are shown under two cases of the RET. The first case shows a family headed by a worker beneficiary who is below FRA throughout the calendar year and is subject to a benefit reduction under the RET equal to one-half of earnings above the lower exempt amount of $14,640 in 2012. The second case shows a family headed by a worker beneficiary who will attain FRA during the calendar year and is subject to a benefit reduction under the RET equal to one-third of earnings above the higher exempt amount of $38,880 in 2012.

The preceding examples illustrate cases in which the worker beneficiary has earnings above the exempt amount. In some cases, both the worker beneficiary and an auxiliary beneficiary (such as a spouse) may have earnings above the exempt amount. Table 4 shows an example of a couple in which (1) one member, the worker beneficiary, receives a retired-worker benefit based on his or her own work record, and (2) one member, the auxiliary beneficiary, receives a spousal benefit only. Both beneficiaries are assumed to be below FRA throughout the calendar year and to have earnings above the RET exempt amount. Because neither beneficiary will attain FRA during the calendar year, both are subject to the same RET exempt amount and benefit reduction rate. Benefit reductions under the RET are applied to the couple in the following order:

First, the worker beneficiary's RET charge is pro-rated and applied to both the worker beneficiary's retired-worker benefit and the auxiliary beneficiary's spousal benefit. Second, if there is a balance remaining on the spousal benefit (if the spousal benefit has not been reduced to zero), the auxiliary beneficiary's RET charge is applied to (and further reduces) his or her spousal benefit only (the auxiliary beneficiary's earnings above the RET exempt amount do not affect the worker beneficiary's retired-worker benefit).

More complex situations may exist in which, for example, a person is dually entitled to a retired-worker benefit (based on his or her own work record) and a spousal benefit (based on a different work record) and the person has earnings above the exempt amount. In the case of a dually-entitled beneficiary, his or her earnings above the exempt amount affect both his or her own retired-worker benefit and the spousal benefit that he or she receives. The dually entitled beneficiary's earnings above the exempt amount do not affect the retired-worker benefit received by his or her spouse because that benefit is based on the spouse's work record.

Table 5 summarizes the applicability of the RET to worker beneficiaries and auxiliary beneficiaries when either type of beneficiary has earnings above the exempt amount.

Policy Issues

Policymakers have asked questions about the RET's impact on labor supply and on the timing of Social Security benefit claims. Some argue that the RET is perceived as a "tax" on work effort, and that it induces workers to work fewer hours, or even to retire completely from the workforce. Another line of enquiry is whether the RET causes workers to delay claiming Social Security benefits. Both of these effects could have important implications for the retirement security of workers, their spouses and their survivors.

Quantitative studies have found mixed evidence concerning the RET's impact on work hours, retirement and the timing of Social Security benefit claims. Although the RET has been found to have a substantial effect on the labor supply of workers at or just above the annual RET threshold, the impact on workers with higher wages and salaries is more ambiguous. There is somewhat stronger evidence that the RET causes workers to delay claiming Social Security benefits.

The RET and Work Incentives

The impact of the RET on work hours varies by income level. At wages and salaries that are at or just above the annual RET threshold, the RET may encourage workers to work fewer hours, to keep wages or salaries just under the RET threshold. This effect is known as "bunching" or "clustering" under the RET threshold. A 1999 study found that a subset of workers do cluster at earnings levels just below the RET threshold.

At higher earnings levels, the RET's impact on work hours is more ambiguous. Some workers perceive the RET as a tax on work effort (despite the recomputation of benefits at FRA). Moreover, other workers who are aware of the recomputation may place a relatively low value on future income. To the extent that the RET is perceived as a tax on earnings, it may induce some workers to reduce their work hours or even to retire completely from the workforce. Other workers, however, may respond to the RET reduction to Social Security benefits by working more, not fewer, hours to reach their income goals or requirements. For these workers, eliminating the RET would increase total income (income from labor plus income from Social Security). This has led some to argue that eliminating the RET would benefit some higher earners because the additional Social Security benefits that would become available would permit higher earners, if they wished, to reduce their work hours.

One study of the period from 1973 to 1998 found that the RET had little or no effect on the aggregate work hours and earnings of men aged 62 and older, although there is somewhat stronger evidence that the RET had an impact on women's earnings (no evidence was found for an impact on women's work hours). However, a study of Social Security beneficiaries' response to the 2000 removal of the RET for beneficiaries at or above FRA found that, when workers are segmented by earnings level, fairly large effects on earnings are found, with the effects on earnings concentrated just below and above the RET threshold. (The study did not examine how work hours were affected by the 2000 change in the RET.) Research has not found the RET to have a large effect on labor force participation, that is, a worker's decision to retire or remain in the workforce. This is perhaps in part because the RET is a relatively small part of the larger retirement decision that includes other factors such as pension rules and the worker's health, and also because it is difficult to separate the RET's impact from the trend toward later retirement that is already under way.

The RET and Incentives to Claim Social Security Benefits

Because the RET applies to persons who are younger than FRA, it may discourage persons below the FRA from claiming benefits. As noted earlier, some workers perceive the RET as a "tax" on benefits received before FRA, even though the recomputation of benefits at FRA (which results in a higher monthly benefit starting at FRA) allows the worker to recoup benefits withheld under the RET.

The quantitative evidence that the RET has an impact on the decision concerning when to claim Social Security benefits is somewhat stronger than the quantitative evidence for the RET's impact on work and earnings. For example, the Gruber and Orszag study that examined persons aged 62 and older during the period from 1973 to 1998 estimated that a $1,000 increase in the RET threshold could increase the share of men aged 62 and older who receive Social Security benefits by 0.7% to 1.6%, while eliminating the RET could increase that share by 5.2% to 13.5%. A more recent study that examined the 2000 elimination of the RET for men and women at or above FRA found a 2 to 5 percentage point increase in benefit claims among men and women aged 65 to 69, and a 3 to 5 percentage point increase among men and women who reach the age of 65.

The RET, Retirement Security and Early Benefit Claims

Some argue that, to the extent the RET causes some workers to delay claiming Social Security benefits, this can be beneficial for the worker as well as for his or her spouse or survivor. Claiming Social Security benefits before the FRA can reduce a worker's Social Security benefit amount in two ways, as noted earlier: (1) through the RET, although when the worker attains FRA his or her benefits are recomputed and a higher monthly benefit amount is payable starting at FRA; and (2) through the actuarial reduction for early retirement which, although it is intended to be actuarially fair to the individual over his or her expected lifetime, causes a permanent reduction to the worker's monthly Social Security benefit amount.

As discussed, the RET applies to spousal benefits. (See section " The RET May Affect Social Security Benefits Received by Spouses, Survivors and Other Dependents .") Spousal benefits that have been reduced by the RET are restored starting when the spouse attains FRA. Spousal benefits are not restored, however, when the RET is applied to the benefits of a spouse who is already at or above FRA. (See " Benefits Withheld Under the RET are Restored Starting at FRA .")

Survivors' benefits may be permanently affected by the worker beneficiary's decision to claim benefits before FRA. Under a provision in the Social Security Act called the widow(er)'s limit provision , the widow(er)'s benefit may be reduced if the widow(er)'s benefit payable on the worker's record exceeds the benefit the worker was receiving (including any actuarial reduction for early retirement that may have reduced the worker's benefit) before his or her death. If a worker has benefits withheld under the RET and he or she dies before attaining FRA (when the worker's benefit would have been recomputed), for purposes of determining the limit on the widow(er)'s benefit, the worker's benefit is recomputed at the time of the worker's death to take into account months for which no benefit or a partial benefit was paid as a result of the RET.

Elderly widows, in particular, may face reduced living standards if their spouses claim benefits before FRA, because of the actuarial reduction to benefits described above. Women tend to outlive their husbands and are therefore more likely than men to receive Social Security survivors' benefits. In addition, individuals and couples are more likely to deplete other assets later in retirement, leaving the couple or surviving spouse more reliant on Social Security.

Other Policy Issues

Some argue that eliminating the RET would have positive budget and economic effects because people would work more and pay more Social Security payroll and other taxes. The effect of the RET on labor supply is probably modest, however, as discussed above.

A common complaint among beneficiaries affected by the RET is that they are being denied a benefit they have "bought and paid for." A related argument is that the RET resembles a form of needs testing, making benefit receipt contingent on demonstrating "need" for this earned benefit. Supporters of the RET counter that Social Security is intended as a form of insurance against the risks of retirement and disability; just as the program does not pay disability benefits to those who are not disabled, it should not pay retirement benefits to those who are not retired.

The recomputation of benefits at FRA to restore benefits withheld under the RET is not widely known or understood. As noted previously, if a beneficiary has benefits withheld under the RET, his or her benefit is recomputed when he or she attains FRA to take into account months for which no benefit or a partial benefit was paid due to the RET. The recomputation results in a higher monthly benefit amount starting at FRA and allows the worker to recoup the value of any benefits "lost" under the RET, assuming he or she lives to average life expectancy. As a result, some observers argue that the RET should not be perceived as a "tax." However, for some workers with shorter lifespans, the recovery of benefits may be incomplete. Conversely, for those who live longer than average, the recomputation may result in higher lifetime benefits that more than make up for the initial benefit reductions under the RET. Because life expectancy is linked to income, some argue that the RET may be regressive on a lifetime basis.

Critics of the RET argue that it discriminates against claimants who must continue working to supplement their benefits. In contrast, claimants with no earnings who have other forms of income, such as private pensions or investment income, can receive full Social Security benefits. Supporters of the RET counter that eliminating the RET would provide a bonus to people who are fortunate enough to be able to continue working after becoming entitled to retirement benefits, and the additional Social Security benefits may allow or encourage some individuals to reduce their work hours.

Financial Effect of Repealing the RET on the Social Security Trust Fund

Under current law, the RET has no major effect on Social Security financing over the long run because, on average , the RET has "no significant effect" on lifetime benefits. Therefore, the Social Security Administration's Office of the Chief Actuary (OCACT) estimates that elimination of the RET for individuals aged 62 or older would have no major effect on Social Security's projected long-range financial outlook.

In the short run, however, OCACT estimates that elimination of the RET would have a negative effect on the Social Security trust fund in the amount of $81 billion from 2012 to 2018. The trust fund would experience a projected cash-flow deficit of $12.1 billion in 2012, and a projected cash-flow deficit of $10.4 billion in 2018. OCACT notes: "In the first several years after elimination of the retirement earnings test, benefit payments are projected to increase substantially, because benefits are paid under the proposal where such payments would be withheld, or the individual would have not applied for benefits yet, under current law."

In summary, OCACT notes that the projected financial effects for the Social Security program of eliminating the RET are due to "(1) some individuals no longer having their benefits withheld, (2) some individuals who would apply for Social Security benefits earlier because of the earnings test elimination, and (3) a small net increase in earnings for individuals currently subject to the earnings test."

Appendix A. Computation of the Social Security Retired-Worker Benefit

To be eligible for a Social Security retired-worker benefit, a person generally needs 40 earnings credits, or 10 years of Social Security-covered employment (among other requirements). A worker's initial monthly benefit is based on his or her 35 highest years of earnings which are indexed to historical wage growth (earnings through the age of 60 are indexed; earnings thereafter are counted at nominal value). The 35 highest years of indexed earnings are divided by 35 to determine the worker's career-average annual earnings. The resulting amount is divided by 12 to determine the worker's average indexed monthly earnings (AIME). If a worker has fewer than 35 years of earnings in covered employment, years of no earnings are entered as zeros.

The worker's basic benefit amount (i.e., before any adjustments for early or delayed retirement) is the primary insurance amount (PIA). The PIA is determined by applying a formula to the AIME as shown in Table A -1 . First, the AIME is sectioned into three brackets, or levels, of earnings. Three progressive factors—90%, 32%, and 15%—are applied to the three different brackets of AIME. The three products derived from multiplying each factor and bracket of AIME are added together. For workers who become eligible for retirement benefits (i.e., those who attain age 62), become disabled, or die in 2012, the PIA is determined as shown in the example in Table A -1 .

Adjustment to Benefits Claimed Before or After FRA

A worker's initial monthly benefit is equal to his or her PIA if he or she begins receiving benefits at FRA (i.e., FRA is the earliest age at which full (unreduced) retirement benefits are payable). A worker's initial monthly benefit will be less than his or her PIA if he or she begins receiving benefits before FRA, and it will be greater than his or her PIA if he or she begins receiving benefits after FRA. As noted previously, FRA ranges from the age of 65 to 67 depending on the person's year of birth.

Retirement benefits are reduced by five-ninths of 1% (or 0.0056) of the worker's PIA for each month of entitlement before FRA up to 36 months, for a reduction of about 6.7% a year. For each month of benefit entitlement before FRA in excess of 36 months, retirement benefits are reduced by five-twelfths of 1% (or 0.0042), for a reduction of 5% a year. Workers who delay filing for benefits until after FRA receive a delayed retirement credit (DRC). The DRC applies beginning with the month the worker attains FRA and ending with the month before he or she attains the age of 70. Starting in 1990, the DRC increased until it reached 8% per year for workers born in 1943 or later (i.e., starting with those who attained age 62 in 2005 or age 66 in 2009).

Appendix B. Social Security Auxiliary Benefits (Benefits for the Worker's Family Members)

Social Security provides benefits to eligible family members of a retired, disabled or deceased worker. Benefits payable to family members are equal to a specified percentage of the worker's PIA, subject to a maximum family benefit amount.

Social Security provides a monthly benefit to the spouse or divorced spouse (if the marriage lasted 10 or more years) of an entitled retired or disabled worker equal to 50% of the worker's PIA. A monthly survivor benefit equal to 100% of the deceased worker's PIA is payable to the surviving spouse or surviving divorced spouse of a worker who was fully insured at the time of death. Benefits for spouses, divorced spouses and surviving spouses are reduced if claimed before FRA. In addition, these benefits are reduced or fully offset if the beneficiary receives his or her own Social Security retired-worker benefit or a pension from a job that was not covered by Social Security (such as certain federal, state or local government jobs).

The child of a disabled or retired worker is eligible for 50% of the worker's PIA. The child of a deceased worker is eligible for 75% of the worker's PIA. Social Security also provides a monthly mother's or father's benefit, equal to 75% of the worker's PIA, to a surviving parent of any age who cares for the deceased worker's child, when that child is under the age of 16 or disabled.

Table B -1 provides a summary of Social Security auxiliary benefits for the family of a retired, disabled or deceased worker, including eligibility requirements related to age and other factors.

Maximum Family Benefit Amount

The total amount of benefits payable to a family based on a retired or deceased worker's record is capped by the maximum family benefit amount. The maximum family benefit varies from 150% to 188% of the retired or deceased worker's PIA, and the maximum family benefit cannot be exceeded regardless of the number of beneficiaries entitled to benefits on the worker's record. If the sum of all benefits based on the worker's record exceeds the maximum family benefit amount, each dependent's or survivor's benefit is reduced in equal proportion to bring the total amount of benefits within the family maximum. For the family of a worker who attains age 62 in 2012, or dies in 2012 before attaining age 62, the total amount of benefits payable is limited to

150% of the first $980 of PIA, plus 272% of PIA over $980 and through $1,415, plus 134% of PIA over $1,415 and through $1,845, plus 175% of PIA over $1,845.

The dollar amounts in the maximum family benefit formula are indexed to average wage growth, as in the primary benefit formula. A separate maximum family benefit formula applies to the family of a worker who is entitled to disability benefits.

Appendix C. Annual Exempt Amounts Under the Social Security Retirement Earnings Test, Calendar Years 2000-2012

The RET annual exempt amount is indexed to average wage growth in the economy. An exception, however, is that the annual exempt amount is not increased in a year during which no Social Security cost-of-living adjustment (COLA) is payable. In 2010 and 2011 there was no Social Security COLA, therefore the RET exempt amount did not increase in these years.

The RET applies only to wage and salary income (i.e., earnings from work). It does not apply to "unearned" income, such as income from pensions, rents, dividends, or interest.