	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. 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. 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. 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. 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). 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. 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. 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. 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. 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. Spousal benefits are not restored, however, when the RET is applied to the benefits of a spouse who is already at or above FRA. 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. 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.
Under the Social Security Retirement Earnings Test (RET), the monthly benefit of a Social Security beneficiary who is below full retirement age (FRA) is reduced if he or she has earnings that exceed an annual threshold. In 2012, a beneficiary who is below FRA and will not attain FRA during the year is subject to a $1 reduction in benefits for each $2 of earnings above $14,640. A beneficiary who will attain FRA in 2012 is subject to a $1 reduction in benefits for each $3 of earnings above $38,880. The annual exempt amounts ($14,640 and $38,880 in 2012) generally are adjusted each year according to average wage growth.
If a beneficiary is affected by the RET, his or her monthly benefit may be reduced in part or in full, depending on the total applicable reduction. For example, if the total applicable reduction is greater than the beneficiary's monthly benefit amount, no monthly benefit is payable for one or more months. If family members also receive auxiliary benefits based on the beneficiary's work record, the reduction is pro-rated and applied to all benefits payable on that work record (including benefits paid to spouses who are above FRA). For example, in the case of a family consisting of a worker beneficiary who has earnings above the annual exempt amount and a spouse and child who receive benefits based on his or her work record, the benefit reduction that applies under the RET is charged against the total family benefit.
The RET has been part of the Social Security program in some form throughout the program's history. The original rationale for the RET was that, as a social insurance system, Social Security protects workers from certain risks, including the loss of earnings due to retirement. Therefore, benefits should be withheld from workers who show by their earnings that they have not "retired." The RET does not apply to Social Security disability beneficiaries who are subject to separate limitations on earnings.
If a beneficiary is affected by the RET, his or her monthly benefit is recomputed, and the dollar amount of the monthly benefit is increased, when he or she attains FRA. This feature of the RET, which allows beneficiaries to recoup benefits "lost" as a result of the RET, is not widely known or understood. The benefit recomputation at FRA is done by adjusting (lessening) the actuarial reduction for retirement before FRA that was applied in the initial benefit computation to take into account months for which benefits were reduced in part or in full under the RET. Any spousal benefits that were reduced because of the RET are recomputed when the spouse attains FRA. For a spouse who has already attained FRA, however, 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.
The Social Security Administration estimates that elimination of the RET for individuals aged 62 or older would have a negative effect on the Social Security trust fund in the amount of $81 billion from 2012 to 2018, although it would have no major effect on Social Security's projected long-range financial outlook.
This report explains how the RET works under current law. In addition, it provides benefit examples to illustrate the effect of the RET on Social Security beneficiaries who are below FRA and family members who receive benefits based on their work records. It also briefly discusses policy issues, including recent research on the effect of the RET on work effort and the decision to claim Social Security benefits. This report will be updated periodically.