You've likely heard of the dreaded "earnings test" for Social
Security benefits. What's sure to be a surprise, however, is that
the earnings test squeezes not only your benefit but also family
members' benefits based on your record. And that could put a
wrinkle in a couple's plan to maximize household income by filing
for a spousal benefit while delaying a higher earner's benefit.
The earnings test hits working beneficiaries who are younger
than full retirement age--age 66 for those born between 1943 and
1954. Under the earnings test, $1 of benefits is withheld for every
$2 in earnings above the annual earnings limit of $15,480 in 2014.
The earnings test disappears at full retirement age.
But a spouse who is full retirement age, as well as the younger
wage earner, could be ensnared by the earnings test. Say the
husband is the higher earner, age 66 and eligible for a full
retirement benefit of $2,500 a month. He is waiting to take
benefits until age 70 to earn delayed retirement credits of 8% a
year--boosting his eventual benefit to $3,300 a month (
see table below for the calculations
In the meantime, he'd like to file a "restricted application"
for a spousal benefit on his lower-earning wife's record to boost
household income. (Under this rule, a spouse who is full retirement
age can choose to file for his own benefit or for a spousal
benefit.) His 62-year-old wife, who is still working, would need to
apply for her own benefit so that he can claim the spousal benefit.
She's eligible for a benefit of $2,000 a month at full retirement
age. By claiming four years early, her benefit would be reduced to
$1,500, but her husband could claim the full spousal benefit of
$1,000 a month because he is full retirement age.
Here's where the earnings test puts the kibosh on the couple's
plan. If not for the earnings test, the couple would be eligible
for a total benefit amount of $30,000 for the year.
In this scenario, the wife is earning $60,000, far above the
earnings limit. The earnings test claims a chunk of the husband's
benefits as well as hers. The Social Security Administration would
withhold $22,260 from the total family benefit, leaving the couple
with $7,740 in benefits for the year. "If any benefits are left
over, no matter how small, the Social Security Administration would
pay them that benefit," says Jim Blair, a former district manager
for an Ohio Social Security office and a partner at Premier Social
Security Consulting, in Sharonville, Ohio.
When the wife turns full retirement age, the Social Security
Administration will adjust her benefit upward to make up for her
forfeited benefit. The husband's lost spousal benefits will be gone
Test Gets Easier at Full Retirement Age
Some good news: The amount a couple can receive goes up in the
year the younger wife turns 66. "There's a special rule for the
earnings test for the year you hit full retirement age," says
William Reichenstein, a professor of finance at Baylor University,
in Waco, Tex.
In the year you hit full retirement age, a different formula
applies: One dollar in benefits will be withheld for every $3 in
earnings above $41,400 in 2014. The amount a couple receives would
The earnings test disappears starting the month you turn full
retirement age. If the younger spouse has a birthday early in the
year, the couple will get the full amount of benefits that much
faster. "If her birthday is early in the year, there's only a few
months the earnings test applies," says Blair.
If she turns 66 in March, for instance, the earnings test would
apply only for January and February. She "wouldn't have earned
enough to exceed the test," says Reichenstein. And as of her
birthday month, she can earn as much as she likes without affecting
her benefit or her husband's spousal benefit.