Social Security Rule Leaves Seniors Confused

The age at which seniors retire impacts their Social Security payments for the rest of their lives, but it turns out many aren't well-informed about how exactly to maximize their earnings.

At age 62, workers have the option to claim Social Security retirement benefits in addition to their salary. Taking this option, however, could lead to lower Social Security payments because of the income they're already earning.

This is because of the retirement earnings test, a rule which is "poorly understood by the public," according to a report from the Social Security Advisory Board.

The report discovered between 20 and 50 percent of pre-retirees are unaware that their monthly benefits could be reduced if they keep working after claiming Social Security. For those who are aware, only between 30 and 40 percent know the reductions are temporary and will be added back at full retirement age.

Financial expert Michael Ryan, who runs michaelryanmoney.com, said he often comes in contact with pre-retirees who are lost on the topic of when they should actually claim for benefits without financial risk.

"I've seen firsthand how lost my clients can feel on topics like what age to file at and how ongoing work impacts their monthly payments," Ryan told Newsweek. "The intricacies of Social Security definitely contribute to this confusion. Just knowing your full retirement age takes decoding based on your birth year, and annual income thresholds that can lessen benefits are changing all the time."

What Is The Rule?

Under the retirement earnings test, those under the full retirement age of 66 or 67 will see smaller benefits if they continue to work. Specifically, it will decline by $1 for every $2 they earn over a certain income.

In 2023, the rule applies to any income above $21,240, but in 2024, the limit will apply starting at $22,320.

When you reach full retirement age, however, it will be a different story. Then, $1 is taken away for every $3 above a certain income. In 2023, that earnings level was $56,520 before a beneficiary reaches retirement age. Meanwhile, in 2024, the limit goes up to $59,520.

But once again, the loss is only temporary for Social Security payments.

As for why so many seniors don't understand the rules, it comes down to lack of education.

"There's a significant gap in effective communication about how working post-retirement affects Social Security benefits," finance expert Markus Kraus, who is also the owner of Trading Verstehen, told Newsweek. "It's crucial for the public to know that working after claiming Social Security may temporarily reduce benefits, but they can increase later upon recalculation."

Financial advisors may also refer to the retirement earnings test as a tax without explaining the full benefit reductions and how they disappear once seniors meet full retirement age.

Social Security Rules Are Complex

Financial advisor Christopher Hensely also encounters this problem with the pre-retiree clients he serves. There are many ways to go wrong and cut down your payments in the future, he said. Making a mistake like not reporting your state pension can also have serious ramifications for your Social Security benefits later on as well.

"This stuff is complex and can be really unforgiving," Hensley said. "People don't always realize that a misunderstanding or a misstep in navigating these rules can have consequences that last for decades."

For seniors who are confused, many end up delaying claiming benefits at all until their full retirement age.

According to Ryan, this may not be the best situation for seniors looking to get extra support at age 62 while still recouping full benefits at their full retirement age.

"While benefits may take a temporary hit early on due to earned wages, your payment does get recalculated upwards later," Ryan said. "I always told my clients, 'It's a short-term dip for a long-term gain.'"

Due to the consistent confusion Americans face regarding their benefits, many have called for the Social Security Administration to create clearer guidelines and information on their website, alongside educating seniors on their options.

"The bottom line here is education and awareness," Hensley said. "People approaching retirement really need clear, straightforward information to navigate these waters safely. It's not just about avoiding pitfalls; it's about making informed choices for a secure retirement."

Do you have a money-related story to share? Newsweek wants to hear from you. Contact us at personalfinance@newsweek.com.