Introduction

Social Security retirement benefits received before a person attains full retirement age (FRA)—between 65 and 67, depending on year of birth¹—are generally subject to an actuarial reduction for early retirement and may be reduced by the 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 every $2 of earnings above an annual exempt amount (also known as a threshold), which is $21,240 in 2023. During the calendar year in which a beneficiary attains FRA, he or she is subject to a $1 reduction in benefits for every $3 of earnings above a higher threshold, which is $56,520 in 2023. Both thresholds are typically increased annually with increases in the national average wage.

This report explains how the RET is applied under current law and provides a detailed example on how the RET affects two hypothetical worker beneficiaries, one younger than FRA throughout the calendar year and one attaining FRA in that calendar year. This report also examines RET features that are not widely known or understood, such as the benefit recomputation 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, this report discusses RET- related policy issues and the RET's potential elimination, including recent research regarding the RET's impact on work effort, the decision to claim Social Security benefits, and poverty rates across certain demographic groups. In brief, key points discussed in this report include the following:

• The RET began as an all-or-nothing retirement test that resulted in complete benefit withholdings for any earnings after claiming retirement benefits. Over time, however, the RET has moved away from this original all-or-nothing nature.
• Under current law, benefits before the FRA may be reduced or withheld for one or more months as a result of the RET.
• The RET was estimated to impact (with full or partial withholding) roughly 520,000 Social Security beneficiaries in 2019.²
• 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.
• Research surrounding the RET provides insight into the current labor and poverty effects of the policy and potential future changes in those effects if current legislative proposals were enacted.
• In 2022, the Social Security Administration's (SSA's) Office of the Chief Actuary (OCACT) estimated that, over the long-range projection period (the next 75 years), eliminating the RET starting in 2025 would have a small positive effect on the Social Security Trust Funds' solvency.³

Social Security and Social Insurance Principles

Background on Social Security

Social Security benefits are designed to partially replace earnings lost to an individual or family because of the retirement, disability, or death of a worker.⁴ Benefits can be paid by either the Old Age, Survivors, and Insurance (OASI) program or the Disability Insurance (DI) program. Although each program has separate financial operations, the two programs are often referred to on a combined basis as OASDI. In February 2023, more than 66 million beneficiaries were in the OASDI program, including retired workers and their dependents (about 52 million people), survivors (nearly 6 million people), and disabled workers and their dependents (nearly 9 million people).⁵ Benefit amounts depend on a worker's earnings history and are funded primarily by payroll and self-employment taxes levied on the earnings of covered workers. For the remainder of this report, the term beneficiary refers to a retired-worker beneficiary unless otherwise noted.

Social Security in the Social Insurance Context

In private insurance, consumers purchase insurance policies by paying premiums in exchange for indemnification (i.e., payment of benefits) if a loss occurs due to a covered reason (known as a peril, which is defined as the direct cause of a loss). If no loss occurs, the insurance company does not pay the policyholder. For example, homeowners' insurance policies will not pay an insured homeowner without some type of loss to the home through fire.

In social insurance, the general insurance principle still applies: payment of benefits only occurs with the presence of a loss due to the insured peril. However, social insurance differs from private insurance in two main ways: (1) it is generally purchased by more of a nation's citizens than other types of insurance (for reasons such as compulsion to purchase, substantial subsidization, or private market failure) and (2) it generally covers more static, inherent risks that have a universal impact and a social adequacy focus.⁶ Social Security benefits for survivor beneficiaries are one example; with survivors' benefits, the test for ensuring a loss has occurred is more finite—is the worker beneficiary alive or not? With Social Security retirement benefits, it can be less finite. With these benefits, beneficiaries effectively pay premiums (through payroll taxes) to be indemnified by benefits paid upon experiencing a loss of income due to the specific peril, namely, retirement.

Payment of Social Security benefits to a beneficiary after retirement is analogous to payment of funds from an insurance company due to a policyholder loss. In both cases, insurance principles dictate that full benefits cannot be paid unless there is evidence of a loss present. For Social Security retirement benefits, the RET ensures that a beneficiary below FRA is eligible for full benefits only if he or she has been the subject of a significant loss (as quantified by earnings dropping below the earnings thresholds). The RET, therefore, was created—and still exists—in an effort to abide by long-standing insurance principles that require a loss to pay benefits.

The Retirement Earnings Test's Basics⁷

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.⁸

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 original PIA if the worker begins receiving benefits before FRA, and it will be greater than his or her original PIA if the worker begins receiving benefits after FRA.⁹

Social Security also provides auxiliary benefits to eligible family members of a retired, disabled, or deceased worker. For more information on auxiliary benefits, see Appendix A.

Who Is Subject to the RET?

Although legislative changes have altered various features of the RET, three key factors still remain to establish the RET's applicability to a worker beneficiary (and, therefore, his or her auxiliary beneficiaries): (1) type of beneficiary, (2) being below FRA, and (3) having earnings above certain thresholds in a year with entitlement to Social Security benefits.¹⁰

Type of Beneficiary

The RET applies only to beneficiaries whose entitlement is not based on a disability. In other words, the RET does not apply to Social Security disabled beneficiaries, including disabled workers, disabled widow(er)s, and disabled adult children.¹¹

Below FRA

The RET can apply to any nondisabled beneficiary below the FRA, which varies between 65 and 67 depending on the year of birth (see Table 1). The FRA is 67 for workers born in 1960 or later (i.e., for workers who become eligible for retirement benefits at age 62 in 2022 or later). The RET does not apply to worker beneficiaries who are at or above FRA (application of the RET ends with the month of FRA attainment). In 2000, legislative changes made the RET applicable only for beneficiaries below FRA; previously, the RET applied to beneficiaries until they reached age 70.¹²

Earnings Above Certain Thresholds

For any beneficiary below FRA who may be subject to the RET, a final test of applicability requires the beneficiary to also exceed an earnings threshold. 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.¹³ A beneficiary with no earnings is not subject to the RET.

After establishing that a worker beneficiary is both of the applicable type and age and has earnings, a beneficiary must compare his or her annual earnings to the annual RET thresholds. In 2023, the RET thresholds are $21,240 for beneficiaries who are below FRA and will not attain FRA this year and $56,520 for beneficiaries who will attain FRA this year. The RET exempt amounts generally increase each year at the same rate as average wages in the national economy.¹⁴ Table B-1 in Appendix B shows the annual exempt amounts under the RET from calendar years 2007 to 2023.

How the RET Works

For those beneficiaries that meet the applicable RET conditions—being nondisabled, younger than FRA, and having earnings at least above the threshold amount ($21,240 in 2023)—the RET reduces Social Security benefits. This reduction occurs in addition to early retirement actuarial reductions. There are also two important considerations when administering the RET: the payment of partial benefits and the grace year provision.

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 every $2 earned above the threshold amount ($21,240 in 2023). For beneficiaries who are below FRA and will attain FRA during the calendar year, Social Security benefits are reduced by $1 for every $3 earned above the threshold amount ($56,520 in 2023).¹⁵

Each year, beneficiaries report predicted earnings for the upcoming year (as they are not verified until the close of the taxable year). Predicted annual 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 every $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 recorded to be paid when the charge to a given month is less than the monthly benefit.

Partial Benefit Payments

According to SSA procedure, when a partial monthly benefit is anticipated to be paid based on projected earnings, the partial monthly benefit is paid only at the close of the taxable year.¹⁶ In essence, the beneficiary must wait until the statement of earnings has been verified, which usually occurs in the first quarter of the following calendar year during tax season. Despite this delay, there is no interest paid for the withheld partial benefits.

By electing to pay the beneficiary in the next calendar year, the SSA is deciding to wait for annual earnings statements to become finalized and validated. Essentially, this is done to ensure that actual earnings from the year are equal to the predicted or reported earnings from the beginning of the year.¹⁷ If the actual earnings are equal to the predicted earnings, the partial benefit is paid as originally calculated. If the actual earnings are higher, however, a larger RET reduction may be warranted, which would come from the unpaid partial benefit month. In some cases, the partial benefit could be reduced to zero if actual earnings for the year exceeded the predicted earnings by a significant amount. Had the partial benefit been paid, the beneficiary would owe the SSA for benefit overpayment. If the opposite occurred, and actual earnings were lower than predicted, the SSA would owe the beneficiary an additional amount above the unpaid partial benefit.

After the month in which the partial monthly benefit is withheld, the beneficiary receives full benefits for the remainder of the year. In Table 2, for example, the first individual (the beneficiary below FRA throughout the calendar year) receives no monthly benefits from January through July due to the RET reductions, and then he or she is due a partial benefit in August. It is this partial monthly benefit due in August that will be paid at the close of the taxable year. The monthly benefits due for the remainder of the year (September through December) are projected to be paid in full on their regular payment schedule.

The intent of this procedure is twofold: administrative simplicity and to save a beneficiary the inconvenience of having to return an overpayment of benefits. In either case, it is administratively simpler to add or deduct additional benefits to or from an outstanding partial benefit payment than to issue an entirely new payment or to request repayment through collections.

The RET in Conjunction with Early Retirement Reductions

When a worker elects to claim Social Security benefits before his or her FRA, he or she is subject to a permanent actuarial reduction in the PIA. 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.¹⁸ The RET is applied to the PIA only after it has been reduced by the early retirement actuarial adjustment. Both the permanent reduction for early retirement and the RET are applied to beneficiaries below FRA.

The Grace Year Provision

A "grace year" generally applies during the first 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.¹⁹ However, after becoming entitled, the monthly earnings test is an absolute one: if exceeding the monthly threshold, the beneficiary will receive no benefits for that month.

In general, the grace year provision ensures that beneficiaries electing entitlement in a calendar year do not receive a withholding of their benefits after they have terminated working, at least from the pre-retirement level. See Appendix C for a detailed example.

Examples of How the RET Works

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: beneficiaries who will remain below FRA throughout the calendar year and beneficiaries who will attain FRA during the calendar year. In accordance with Table 2, the two single worker beneficiaries in the following examples experience the effects of the RET:

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 (after the reduction for early retirement) and earnings of $58,000 in 2023. Because this worker beneficiary is below FRA throughout the calendar year, he or she is subject to a $1 reduction in benefits for every $2 of earnings above the annual exempt amount of $21,240 in 2023. Therefore, the worker has excess earnings equal to $36,760 and will have an RET reduction (an RET charge) equal to $18,380. Each month, the original monthly benefit ($2,000) is withdrawn from the RET charge, so, for this beneficiary, there will be nine months of entirely withheld benefits, one partially withheld month of benefits in October, and two months of full benefits paid.

Single Worker Beneficiary Who Attains FRA in September of This Calendar Year

This example shows a worker beneficiary with a monthly benefit amount of $2,000 (after the reduction for early retirement) and earnings of $58,000 in 2023. Because this worker beneficiary will attain FRA during September of this calendar year, he or she is subject to a $1 reduction in benefits for every $3 of earnings above the annual exempt amount of $56,520 in 2021. Therefore, the worker has excess earnings equal to $1,480 and will have an RET reduction (an RET charge) equal to $493. For this beneficiary, there will only be one partially withheld month (January, wherein the RET charge becomes $0) with full benefits paid for the remainder of the year. As he or she is attaining FRA in September, the monthly benefit in September and beyond will be higher than $2,000 as it is readjusted for all of the months since entitlement that the beneficiary had benefits withheld, in part or in full, due to the RET.

Restoration of RET-Withheld Benefits Upon Attaining 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 (i.e., 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 addition, the Social Security Administration also automatically checks the person's record each year to determine if the additional earnings will increase his or her monthly benefit.²⁰ Detailed examples are in Table 3.

Stated generally, if a worker's benefits are reduced in the initial benefit computation to reflect the number of months of early retirement, and the worker subsequently has benefits withheld under the RET for some or all of these months, the benefit recomputation at FRA will reflect an actuarial reduction for the months of early retirement during which benefits were withheld, resulting in a higher monthly benefit amount starting at FRA. In essence, the worker is treated as if he or she had claimed benefits a year later than when he or she actually did and receives the lower actuarial adjustment for early retirement as a result.

Application of the Recomputation of Benefits After FRA

Considering a worker from Table 3, assume that the worker began receiving benefits at the age of 62, which is five-full years before the worker's FRA of 67 (for those born in 1960 or later and turning FRA in 2027 or later). The worker has earnings above the RET threshold. As such, he or she is subject both (1) the actuarial reduction for benefit entitlement before FRA and (2) benefit withholding under the RET.

1. Actuarial reduction for early retirement

With five years of pre-FRA entitlement, this beneficiary is subject to both levels of the actuarial reduction: the first three years immediately prior to FRA (consider the years aged 64, 65, and 66) are reduced at a combined 20% and the additional two years (consider the years aged 62 and 63) are reduced at a combined 10%.²¹ With a total benefit reduction of 30%, the beneficiary's original $2,500 monthly benefit is reduced to $1,750.²²

2. Benefit withholding under the RET

In addition, the person continues to work throughout the five-year period from age 62 to age 67 and has earnings above the threshold in each year causing a reduction in his or her monthly benefit under the RET. If this worker has his or her benefits affected by the RET for, hypothetically, eight months each year, it can be determined that the RET results in 40 months (January-August for each of the five years) of affected benefits (either zero or partial). The benefit recomputation when the person attains FRA will take into account that the person received either zero or partial benefits for 40 months as a result of the RET.

3. Recomputation of benefits

Specifically, the reduction factor for benefit entitlement before FRA will be adjusted from 60 months to 20 months (60 – 40 = 20). The first 24 months are adjusted at 5% per year, which is a 10% change. Then, for the remaining 16 months, benefits are adjusted at the 6.67% annual rate for a total adjustment of 8.89%. Combining the 10% and 8.89% adjustments, the original 30% actuarial reduction will be adjusted for 40 months by 18.89% for a new actuarial reduction of 11.11%, which represents the 20 remaining months above. This beneficiary is now eligible for a benefit of $2,222 per month. While this benefit is still reduced from the original $2,500 amount because of the early retirement actuarial reductions, the beneficiary receives a higher monthly benefit than the original $2,000 because benefits withheld under the RET are restored at FRA.

Worker Beneficiaries' Earnings Levels

Table 4 shows the number of worker beneficiaries who had earnings in 2019, the most recent year for which data are available from SSA's 1-Percent Continuous Work History Sample. More than 3.2 million worker beneficiaries who were below FRA during all or part of 2019 had earnings.

With respect to the data shown in Table 4, 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.

Although these 3.2 million worker beneficiaries are not all affected by the RET, these data provide insight into the universe of worker beneficiaries who could be affected by the RET. For those below FRA throughout 2019, the threshold was $17,640 annually, and for those attaining FRA in 2019, the threshold was $46,920 annually. When identifying the nearest ranges (those from $1 to $19,999, which is the closest threshold to $17,640 and from $1 to $44,999, which is the closest threshold to $46,920), it is clear that a majority of the worker beneficiaries with earnings (more than 50% in each population) have earnings below the threshold amounts; in the "Policy Issues" section below, the dispersion across earnings levels will provide a useful context.

Historical Background

As mentioned earlier, Social Security benefits are meant to partially replace earnings lost to an individual or family because of the worker's retirement, disability, or death. The rationale for the RET was outlined by the Committee on Economic Security, which developed the Roosevelt Administration's economic security bill.²³ The committee's 1935 report recommended that no benefits be paid before a person had "retired from gainful employment."²⁴ This recommendation was emblematic of the pure social insurance idea discussed previously. The House elected not to include this recommendation in its version of the Social Security Act due to drafting difficulties in defining these terms.²⁵ However, after discussing the matter further, the Senate elected to include the recommendation in its version of the Social Security Act.²⁶ The report accompanying the Senate bill noted:

A further important change in the parts of this bill dealing with old-age security which we recommend is the amendment to section 202 to the effect that old-age benefits shall be paid only to employees over 65 years of age who are no longer regularly employed. This was provided in the original bill but as the measure comes to the Senate it permits payment of old-age benefits to workers who have reached age 65 but who still continue in regular employment. This is an anomaly which we believe should not be permitted. There is no need for payment of old-age benefits to employees who continue in employment. This feature of the House bill materially increases the costs and would have necessitated additional taxes in future years. The amendment we suggest to section 202 will prevent anyone from drawing an old-age benefit while regularly employed. This will reduce the costs under title II by many millions of dollars in the course of the decades.²⁷

The Senate bill barred payment of benefits for any month in which a beneficiary received wages from "regular employment." This provision was later agreed to in conference and became part of the original Social Security Act in 1935.²⁸ However, the provision never went into effect because the Social Security Board, and other prominent figures, thought it would be nearly impossible to determine the practical definition of regular employment in different industries and occupations. Instead, the board recommended a specific monetary amount to simplify administration. In 1939, and before any benefits were ever paid, Congress incorporated these recommendations in amendments to the Social Security Act.²⁹ Starting with the first benefits paid in 1940, benefits were withheld entirely for months in which covered earnings were $15 or more. In essence, this put a price tag on retirement: being retired constituted receiving Social Security benefits and a salary for work of no more than $14.99 per month. According to one official, "no specific studies were conducted by the board or its staff to determine the $15 limit. The figure was a purely judgmental one, based upon the conditions in the prevailing labor market."³⁰

At this point, the RET applied to anyone claiming benefits; in line with the principle of social insurance, there was not yet an age at which the RET no longer applied. Over time, various aspects of the RET became subject to legislative attention, including age limits, earnings thresholds, and its all-or-nothing nature.

Age Limits

An RET age limit is the age at which the RET no longer applies. Lawmakers first applied an age limit to the RET as part of the Social Security Act Amendments of 1950. In 1950, the RET was made applicable only to retirees up until age 75, at which point Social Security benefits were no longer reduced for the worker's earnings. Lawmakers continued to lower the age limit throughout the second half of the 20^th century: to age 72 in 1954, age 70 in 1977, and FRA (see Table 1) in 2000.

Earnings Thresholds

Other than the age at which the RET applied, a major issue of concern to the RET since the establishment of the Social Security Act was related to the earnings thresholds at which the RET would become applicable. As mentioned above, the threshold was first changed in 1939 (from $0 to $15 per month). The threshold was subsequently increased over the years on an ad hoc basis. Finally, the earnings thresholds were indexed to national average wage growth in 1972 (effective in 1975).³¹

All-or-Nothing Nature

Until 1972, the all-or-nothing nature of the RET remained.³² Once hitting the threshold, a beneficiary's monthly benefit would be reduced to $0, which was the subject of much criticism (especially from those that were self-employed). In response, lawmakers amended the Social Security Act in 1972 to end the all-or-nothing RET reduction and replace it with a new one: $1 for every $2 in earnings beyond the RET thresholds. Later, in 1983, lawmakers established the two-threshold structure ($1 for every $2 over the threshold for those between age 62 and 64 and $1 for every $3 over the threshold for those between age 65 and 69). In 2000, the current structure was created ($1 for every $2 over the threshold for those not attaining FRA in a certain calendar year and $1 for every $3 over the threshold for those attaining FRA in that calendar year).

Other Notable Developments

The RET has evolved from a monthly test to an annual one (with the exception of the "grace year" as discussed previously). Until 1977, the monthly test was used, which allowed workers to have a few months of earnings high enough to result in no benefits yet still receive benefits in the months for which they fell under the threshold. These amendments in 1977 marked the first time that the RET was made "less generous" since its inception in 1935.

Another major change materialized with the implementation of delayed retirement credits (DRCs) in 1972. Although DRCs are generally thought of as increased benefits for delayed retirement, they also are what provide for the recomputation of benefits at FRA to account for months wherein Social Security benefits were entirely or partially withheld due to the RET.

The most recent legislative change to the RET occurred in 2000 when Congress eliminated the RET for beneficiaries beginning with the month they attain FRA. This change was proposed under the Senior Citizens' Freedom to Work Act of 2000, which became P.L. 106-182. During the congressional debates of 2000, the desire to incentivize those between FRA and age 70 to return to substantial work (resulting in earnings above the thresholds that existed) was the leading push to create legislation.³³ During congressional debates on the legislation that became P.L. 106-182, Members of Congress expressed an expectation that eliminating the RET at FRA would lead to an increase in both the earnings of those who were decreasing hours worked (to keep pay below RET thresholds) and the overall labor force participation rate among those who had already retired from work. In the research analyzing the results from 2000, which is discussed in detail below, those expectations were met for some populations, specifically with large earnings increases for those with higher incomes and increases in the labor force participation rate for women (except for married women).

Policy Issues

Policymakers have questioned the RET's impact on labor supply and the timing of Social Security benefit claiming. Some argue that the RET is perceived as a "tax" or penalty on work effort, and that it induces workers to work fewer hours or even to retire completely from the workforce. Others argue that the RET causes workers to delay claiming Social Security benefits. However, the recomputation of benefits at FRA to account for any benefits affected by the RET is not well known or understood. Nevertheless, both of these effects could have important implications for the retirement security of older workers. Quantitative studies have found mixed evidence concerning the RET's impact on work hours, retirement decisions, and the timing of Social Security benefit claims. As a result, it is necessary to examine the impact of the RET and potential repeal of the RET on individuals across different income levels and demographic groups.

The RET, Threshold Bunching, and Individual Behavior

Bunching Behavior at Lower Earnings Levels

Research has shown that a significant impact of the RET—both before and after the major legislative action of 2000 to eliminate the RET above FRA—is the bunching of labor hours by individuals at the RET threshold amounts. Although the individual decision to increase or decrease hours worked varies by income level, the notion is that for earnings at or just above the annual RET threshold, the RET may encourage workers to work fewer hours and keep earnings just under the RET threshold. This effect is known as bunching under the RET threshold. An often-cited 1999 study found that a subset of workers do cluster at earnings levels just below the RET threshold.³⁴ Other research has noted and documented a similar phenomenon.³⁵ In addition, a 2007 study noted that the previously seen bunching at earnings thresholds for those between FRA and age 70 had disappeared after the 2000 legislation.³⁶ This finding was significant in acknowledging the direct, and seemingly rapid, impact policymakers can have—in this case, with a partial RET repeal (above FRA)—on the behavior of lower earning Social Security beneficiaries regarding their hours worked.

Ambiguity at Higher Earnings Levels

At higher earnings levels (far above threshold 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. 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 of Social Security benefits in other ways depending on combined family benefits and total family income.³⁷

Lifecycle and Myopic Views

Despite the literature's finding of an altered labor supply, the RET is actuarially fair in its readjustment of benefits at FRA—meaning that over the course of the average person's lifespan, he or she will receive all of the benefits withheld due to the RET—and as such, there should not be an altered labor supply. However, because there is an effect, two schools of thought regarding how to study the RET exist: the lifecycle view and the myopic view.³⁸ The lifecycle view is generally held by those workers who understand that the RET withholdings will be coming back to them in an actuarially neutral manner, considering the average person's lifespan. Therefore, those individuals would not look at the RET as a "tax" entirely. The myopic view, in contrast, is more commonly held by individuals who do not give the same economic value to the increased benefits later in life. In that way, those beneficiaries are more myopic and prefer a dollar today to two dollars tomorrow. As such, people with the myopic view are generally held to that view because of particular circumstances and beliefs, such as they have a limited ability to borrow money in the present, a shorter-than-average lifespan, a risk averse attitude, a higher personal discount rate,³⁹ or a lack of awareness of the later benefit readjustment. The higher personal discount rate is emblematic of someone who views the RET as having a less than actuarially fair impact on him or her with his or her prioritization of current and present benefits.⁴⁰

The RET and Aggregate Labor Behavior

Labor force participation is a worker's decision to remain in the workforce or not, while the aggregate labor supply looks at total hours worked by workers and beneficiaries across the retired-worker beneficiary population. The effect of the RET on the labor force participation and aggregate labor supply is important for policymakers. When advocating for the repeal of the RET, some policymakers want to incentivize retirees to go back to work or discourage people from exiting the paid labor force. Research has suggested mixed impacts of the RET on the labor supply decision of older workers.

Earlier studies largely concluded that the RET has little meaningful impact on the labor supply decision for older men.⁴¹ One 2003 study of the 1973-1998 period 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 raising the RET thresholds would have a positive impact on women's earnings (no evidence was found for an impact on women's work hours).⁴² Another study, using Social Security administrative data matched with data from the Survey of Income and Program Participation, also found no clear evidence of an increase in employment among workers aged 65-69 following the elimination of the RET in 2000 for those between FRA and age 69.⁴³

Other studies, however, have suggested that the RET has a large effect on labor force participation and aggregate labor supply. One study estimated that the RET reduced the employment rate of those aged 63-64 by about 3.3 percentage points using Social Security Administration data from 1968 to 1987.⁴⁴ A 2004 study estimated a life cycle model of retirement and wealth and found that the RET reduced the share of married men aged 62 to FRA who worked full time by about four percentage points.⁴⁵ A more recent study estimated a life cycle model of retirement, savings, pension wealth, and health insurance for older men using data from the Health and Retirement Study and found that the 2000 RET repeal for those between FRA and age 69 could increase the labor force participation among men aged 65-69 by about 8%.⁴⁶ Another study estimated that the 2000 RET repeal increased weeks worked per year by 11.0% and hours worked per week by 17.7% for workers aged 65-69.⁴⁷ A 2008 study, using longitudinal administrative earnings data and survey data, also found that at least 4.8% of the workforce adjusted their labor supply in response to the RET reform, and relatively younger men responded more to the RET reform than did older men.⁴⁸

Research has also suggested that the RET may have a relatively large impact on certain groups of older workers. One study concluded that the RET from 1978 to 1987 reduced the employment rate by more than one percentage point for a group of workers with earnings around the RET thresholds.⁴⁹ In addition, a 2018 study, which used data through 2012, theorized that the labor force participation rate generally rose for women after the 2000 RET repeal. However, that increase only materialized for women who were single, divorced, separated, or widowed (married women saw a decrease in their labor force participation rate).⁵⁰

Additionally, several studies found that beneficiaries below FRA are also affected by the 2000 RET repeal for those between FRA and age 69. Social Security beneficiaries who are under FRA and have earnings above the RET thresholds may face two different types of choices. One is to reduce their labor supply first and increase it after reaching FRA (the point at which earnings are no longer subject to the RET). The other option is to return to work and increase their labor supply so that they can secure a position until reaching FRA. The latter choice is motived by the fact that re-entering the labor market is relatively challenging for older workers (also referred to labor market rigidities). Several studies have shown evidence to support the latter choice, that is, the RET repeal for those at or above FRA increases the labor supply among younger workers (those below FRA). For example, one study found that those slightly younger workers (below FRA) increased their weeks worked per year by 5.4% and hours worked per week by 5.1% in response to the 2000 RET repeal.⁵¹ This finding raises the question for policymakers of whether a complete repeal of the RET (for those between age 62 and FRA) would affect the labor supply decisions of slightly younger workers (i.e., those below age 62).

Research has not drawn an unambiguous conclusion on the impact of the RET on the labor supply decision of older workers. The different data and methods and disparate population segments may explain the inconclusive findings in various studies. However, as shown in some analysis, the effect of the RET on the labor force participation and the aggregate labor supply is not negligible for many workers who are eligible for Social Security retirement benefits and also those slightly younger workers who are approaching retirement age. The removal of the RET could increase labor force participation and aggregate labor supply by inspiring older workers to stay in the work force and retire at a later age. It may also encourage older workers to re-enter the labor force after time outside of it, although labor market rigidities sometimes prevent this attempt.

The RET and Equity Among Retired-Worker Beneficiaries

With respect to the RET in current law, Social Security beneficiaries can be categorized into one of three groups: (1) those with no earnings or earnings below the RET limit, (2) those affected by the RET with the result being decreased monthly benefit payments, and (3) those with earnings high enough as to result in no monthly benefit payment.⁵² Each group in this study may react to a potential repeal of the RET differently. In general, the first group's behavior would remain unchanged; the second group's behavior change is ambiguous depending on the value each beneficiary places on either (1) increasing his or her work with the increased Social Security benefits due to the repeal of the RET or (2) decreasing his or her work due to the increased benefits due to the repeal of the RET; and the third group's behavior would lead some to reduce work hours due to substantially increased income from receiving Social Security benefits that were previously withheld in their entirety.

These differences have led some to argue that eliminating the RET would unequally 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. Critics of the RET contend that the RET 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.

The idea that the repeal of the RET benefits different earning levels in an inequitable way was examined in a 2003/2004 report—one of the first studies to analyze the impacts of the 2000 legislation—which pointed out that increased total income was statistically significant and large in size for higher earners, but, for lower earners, there was no statistical significance.⁵³ This statistically significant disparity among the retired-worker beneficiary population indicates that high earners would experience a more substantial benefit than low earners if the RET were to be repealed. These findings were also replicated in a 2007 paper.⁵⁴

Another equity-related consideration is whether some beneficiaries will live long enough to fully realize the higher benefit amounts stemming from the recomputation at FRA. When considering the actuarial fairness of the recomputation, which is the idea that a worker with an average lifespan will earn back the benefits withheld due to the RET, workers with a shorter than average lifespan may feel that the recovery of benefits is incomplete. Conversely, for those who live longer than average, the recomputation may result in higher lifetime benefits that more than earn back the initial benefit reductions under the RET. Because life expectancy is correlated with income, some argue that the RET may be regressive on a lifetime basis.⁵⁵

These different effects of an RET repeal across the retired-worker beneficiary population present challenges for policymakers. Often, the argument in favor of the RET repeal is to assist those with low earnings in avoiding unnecessary taxation and to incentivize working further into the elder years. While that view may ignore the benefit readjustment at FRA, it assumes that the impact on the entire retired-worker beneficiary population will be universally equal.

The RET and Benefit Claiming Behavior

Because the RET applies to persons who are younger than FRA, studies suggest that it may discourage persons below the FRA from claiming benefits early. 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.

Numerous studies have found evidence that the RET does have an impact on the decision concerning when to claim Social Security benefits. For example, a 2003 study examined persons aged 62 and older during the 1973-1998 period and estimated that a $1,000 increase in the RET threshold could increase the share of men aged 62 and older who claim Social Security benefits by 0.7% to 1.6%, while eliminating the RET could increase that share by 5.2% to 13.5%.⁵⁶ A 2007 study, which examined the 2000 elimination of the RET for men and women at or above FRA, found an increase in benefit claims between 2% and 5% among men and women aged 65-69, and an increase by 3%-5% among men and women who were reaching the age of 65.⁵⁷ More recent studies also showed that the repeal of the RET in 2000 for beneficiaries between FRA and age 69 was followed by a temporary increase in benefit claims among persons aged 65-69 who were working and had deferred claiming retired-worker benefits.⁵⁸

There is other pertinent literature that helps to establish the impacts on benefit claiming and receipt of a complete RET repeal, which is the focus of some policymakers. A 2003 study predicted increased early take-up of benefits in the future if the RET were to be repealed for those younger than FRA.⁵⁹ Similarly, a 2004 study found that complete repeal of the RET would lead to an increase of benefit take-up for married men by 10%.⁶⁰ Likewise, a 2013 study found that RET repeal could lead to significant increases (14.4% with assumed behavioral responses discussed earlier) in beneficiaries becoming entitled earlier than their FRAs by 2050.⁶¹ From all of these sources, the authors suggest that a complete elimination of the RET would lead to significant early benefit claiming before FRA.

RET Repeal and the Impact on Poverty Rates

Another consideration for policymakers is the effect of the RET on poverty rates. When considering the potential repeal of the RET, if more people claim at age 62 because of no perceived tax, then more people would become subject to the permanent actuarial reduction in benefits, which increases for every month of entitlement before the FRA. Without the RET, this permanent reduction would no longer be lessened after FRA, unless there is a year of work in which the salary would be substantial enough to impact the PIA calculation (in which case the beneficiary would still be subject to the permanent percentage reduction). If a hypothetical beneficiary retires and claims benefits at the age of 64, three years before his or her hypothetical FRA, that beneficiary is subject to a permanent reduction of his or her benefits by 20% per month. If the repeal of the RET encouraged the hypothetical beneficiary to claim benefits earlier than he or she otherwise would have under current law, then the beneficiary would be subject to more years of permanently reduced benefits and at a higher reduction rate. For example, if that same hypothetical beneficiary were to retire at the age of 62, five years before his or her hypothetical FRA, he or she would be subject to a 30% permanent reduction and for two years longer than before (those years age 62 and 63). This permanent reduction, cemented further without a later RET readjustment, is the cause for poverty concerns later in a beneficiary's life, particularly at older ages.

Considerable evidence shows that poverty levels may increase in response to a complete repeal of the RET. A 2000 paper estimates that the poverty impact may be significant; specifically, the paper estimates the following potential percentage point increases in poverty rates after potential RET repeal: 2.3% among women, 3.6% among widow(er)s, 1.1% among married couples, 3.7% among surviving-spouse beneficiaries, 2.4% among those aged 70-79, and 4.4% among those aged 80-89. ⁶² In addition, more recent research from 2016 shows that the complete repeal of the RET would increase the likelihood of very low incomes among women in their mid-70s and older.⁶³ While another study is not specific about the timeframe of poverty-related impacts of a repeal, it projects that the negative impacts on poverty would occur.⁶⁴ Certain Social Security provisions help provide the explanation for these variations in poverty rates across demographic groups.

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 known as 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.⁶⁵ 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 account for months for which no benefit or a partial benefit was paid as a result of the RET.

Elderly beneficiaries, in particular, may face reduced living standards if their spouse claims benefits before FRA, because of the actuarial reduction to benefits described above. In general, women tend to outlive their husbands and are, therefore, more likely than men to receive Social Security survivors' benefits. If these survivors' benefits are decreased permanently, women stand to be adversely impacted by an RET repeal. 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.

RET Repeal and the Impact on the OASDI Program

An elimination of the RET for those below their FRA (e.g., as proposed in the 116^th Congress in H.R. 2663, the Senior Citizens' Freedom to Work Act of 2019) would have had two opposing impacts on the financial outlook of the Social Security program: (1) an increase in costs in the near-term and (2) a decrease in costs in the long-term. In comparing these two impacts in aggregate, a net impact on the program could be calculated.⁶⁶

Near-Term Increase in Program Costs

An immediate increase in program costs would occur as a result of two populations receiving increased benefits: (1) those who had benefits withheld due to the RET who would newly receive no reduction and, therefore, whose benefits would increase and (2) some of those who were previously not receiving benefits and were planning to start entitlement later could elect to receive benefits sooner than they otherwise would under current law. This latter group includes those individuals who would newly be able to receive benefits at age 62 and continue to work with no reduction in benefits under the RET, though they would still be subject to early retirement benefit reductions.

In 2019, roughly 450,000 beneficiaries were affected by the RET and the early retirement reduction mentioned earlier.⁶⁷ In addition, SSA's Office of the Chief Actuary (OCACT) estimated that, in 2019, out of the 5 million worker beneficiaries between age 62 and 65 who were eligible for retired-worker benefits but have delayed entitlement and would have earnings over the RET thresholds, 1.7 million would apply for benefits earlier as a result of the RET repeal.⁶⁸

Long-Term Decrease in Program Costs

Although eliminating the RET would increase short-term program costs, there would also be a decrease in program costs in the long run. This decrease in program costs stems primarily from the increased incidence of beneficiaries becoming subject to the actuarial reduction in benefits for early retirement. While this reduction is intended to be actuarially fair over the average lifetime and, seemingly, would not result in decreased lifetime benefits, the OCACT points out that the "overall net decrease in benefits occurs because of changes over time in life expectancy and interest rates."⁶⁹ This statement highlights, again, the correlation between life expectancy and lifetime Social Security benefits.

When considering this in the context of the numbers mentioned above, the 450,000 beneficiaries affected by the RET and the early retirement actuarial benefit reduction would all receive increased benefits immediately, but they would no longer be subject to an increase in benefits at FRA due to the RET readjustment. As a result, they would receive lower monthly benefits for the rest of their lives. This impact, driven by the OCACT's prediction of future changes in life expectancy and interest rates, would result in program savings in the long-term. OCACT predicts that 1.7 million workers (of the 5 million referenced earlier) would claim benefits before FRA, which would lead to an immediate increase in total benefits paid by Social Security; however, these new beneficiaries would all receive an early retirement benefit reduction of a permanent nature. According to the OCACT's letter, the permanent reduction in monthly benefit levels would, on average, more than offset the value of additional benefit payments from earlier claiming over the long run.

Aggregate Results

In the short run, the OCACT used a 10-year outlook on the proposal using nominal dollars (as opposed to present value dollars).⁷⁰ Within this outlook, the OCACT estimated that eliminating the RET for all beneficiaries in 2020 and later (e.g., as proposed in the 116^th Congress in H.R. 2663, the Senior Citizens' Freedom to Work Act of 2019) would result in an average $19.91 billion increase in Old-Age, Survivors, and Disability Insurance (OASDI) costs per year over the 2020-2029 period. This included projected cost increases exceeding $20 billion each year from 2020 through 2027.

These annual cost increases were projected to be alleviated by 2038 when costs decline, resulting in program savings.⁷¹ The OASDI program would continue to save money—through cost decreases—throughout the remainder of the 75-year projection period (2019-2093).

When considering both the financial impact and the time over which that impact occurs, the OCACT letter referenced above concluded that, over the long-range projection period of 75 years, elimination of the RET completely would lead to an improvement in the "long-range OASDI actuarial deficit by 0.03% of taxable payroll" and a reduction in the "annual deficit for the OASDI program by 0.11% of payroll for 2093."⁷² Stated differently, the elimination of the RET would reduce the trust funds' long-term funding shortfall by about 1%, with the funding shortfall in 2093 reduced by about 3%.⁷³

Conclusion

Originally, the RET was created—and, largely, still exists—in an effort to abide by long-standing insurance principles that require a significant loss to pay benefits. For Social Security retirement benefits, the RET quantifies a significant loss as occurring when earnings drop below the earnings thresholds. Upon FRA, benefits are recomputed to restore benefits withheld due to the RET. However, because the RET is unpopular among many beneficiaries, and may be seen as a "tax" or as a withholding of a benefit they have "bought and paid for," Congress has legislated changes to the RET throughout program history (specifically, to change the age limit, the earnings thresholds, and the all-or-nothing nature). Recently, a complete repeal of the RET has been the subject of legislative attention.

As the research suggests, a complete RET repeal is likely to increase the hours worked for certain populations (such as those with lower incomes near RET thresholds) and decrease the hours worked for others (such as those with higher incomes for whom the RET withholds the entirety of the year's benefits). And it may also increase the overall labor force participation rate and aggregate labor supply by inspiring some older workers to work longer before retiring or encouraging retired workers to re-enter the labor force (although labor market rigidities may sometimes prevent this attempt). Furthermore, research suggests that a repeal of the RET is likely to incentivize the early take-up of benefits, which would lead to a higher frequency of permanently reduced benefits due to actuarial reductions for early retirement. With no recalculation for later benefits remaining after RET removal, these lifetime lower benefits would increase the likelihood of poverty incidence for certain groups, especially women and those aged 80-89.

According to the OCACT's cost estimate, eliminating the RET would slightly reduce the OASDI cost. Increased program costs for benefits paid to individuals under the FRA would be more than offset by the lower monthly benefits due to early retirement benefit reductions because of changes over time in life expectancy and interest rates.

Appendix A. Social Security Auxiliary Benefits

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. That maximum family benefit amount is a function of the worker's PIA and is generally between 150% and 188% of that PIA.⁷⁴

In general, two ways exist 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 who have their own earnings, even if they do not have their own retired worker benefits, are subject to the same annual exempt amounts and benefit reduction rates on their auxiliary benefits that apply to worker beneficiaries. An auxiliary beneficiary qualifying for benefits based on another beneficiary's work record (e.g., a spouse or a parent) and on his or her own work record is deemed dually entitled.⁷⁵

The RET does not apply to disabled beneficiaries, including disabled auxiliary beneficiaries.

Table A-1 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.⁷⁶ 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:⁷⁷

• 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 from his or her own earnings 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).

Table A-2 summarizes the applicability of the RET to worker beneficiaries and auxiliary beneficiaries when either type of beneficiary has earnings above the exempt amount.

Appendix B. Annual Exempt Amounts Under the Social Security Retirement Earnings Test, Calendar Years 2007-2023

The RET annual exempt amounts are indexed to average wage growth in the economy. An exception, however, is that the annual exempt amounts are not increased in a year during which no Social Security cost-of-living adjustment (COLA) is payable. In some years—such as, 2010, 2011, and 2016—there were no Social Security COLAs payable, so the RET exempt amounts 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.

Appendix C. The Grace Year Provision Illustrated