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Social Security's Earnings Test in 2020: Will You Forfeit Your Benefits?

Tens of millions of Americans rely on Social Security to provide them with monthly income in retirement. It's become increasingly popular over the years to collect Social Security before reaching full retirement age, with partial benefits available to most people once they turn 62.

What some people find surprising is that there's no requirement to stop working before collecting Social Security, and many people claim their benefits before they quit their jobs. That's perfectly permissible, but there are some rules that can take away some or all of your Social Security benefits if your earnings exceed certain amounts. Those threshold values change every year, and although the numbers for 2020 allow working Social Security recipients to have slightly higher wages and salaries, it's still important to know whether you're in danger of forfeiting your benefit checks.

What the 2020 Social Security earnings test looks like

The earnings test applies to those who collect benefits before they reach full retirement age and are still earning money from wage or salary income or from self-employment. In particular, there are a couple of different sets of income limits, above which you can start to have to give back a portion of your Social Security payments.

Social Security's Earnings Test in 2020: Will You Forfeit Your Benefits?
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One set of rules applies to those who will be below their full retirement age throughout 2020. You can earn up to $18,240 in 2020 without having to worry about forfeiting benefits. That figure's up by $600 from the earnings limit in 2019. Above that amount, you'll have to give back $1 in annual benefits for every $2 extra you earn. So if you earn $19,240 -- $1,000 over the limit -- you'll have to forfeit $500.

If you're going to hit your full retirement age during 2020, then another set of rules applies. For them, higher earnings are allowed, with the 2020 limit set at $48,600. That's up $1,680 from the 2019 amount. Only earnings from the period before you reach your full retirement age count toward the total, and even if you're above the threshold, you lose $1 in annual benefits for every $3 extra that you earn.

Finally, there are some additional provisions that apply to special situations. If you first claim benefits in the middle of the year, then your earnings from before you claimed won't matter, but earnings above $1,520 per month will lead to forfeiture. Conversely, if you quit your job in the middle of the year, you'll still be able to collect Social Security for the months in which you aren't working -- even if your earnings would've been high enough to wipe out your entire year's Social Security benefits.

Do you really lose your benefits forever?

There's a common misconception that once you forfeit your benefits, you never get them back. What happens is actually more complicated than that.

It's true that you never directly receive the money that previously got taken out of your Social Security benefits. In that sense, the forfeiture is permanent.

However, for every month's worth of benefits that you forfeit, you're treated as if you had started collecting your Social Security a month later than you actually did. Because your full retirement benefit is reduced for every month that you claim early, the impact of getting a month's worth of credit back is to boost the size of your monthly payment later on. The boost is just a small percentage of your overall benefits, so it'll take a long time for you to recoup the forfeited amount. Eventually, though, the payment amount increase should let you catch up to where you would've been if you hadn't had to give back any of your benefits.

Think before you claim early

If you intend to work into your early to mid-60s and make significant amounts of money, it might make more sense simply not to claim your Social Security until you decide to retire. If you'll just end up forfeiting most or all of your benefits anyway, there's no downside to waiting. If your earnings are modest enough not to cause problems with Social Security forfeiture, however, then the extra financial boost from Social Security can be worth looking at more closely.