Social Security’s $1-for-$2 Penalty Comes Under Fire
Working seniors who collect Social Security before full retirement age can face a steep financial penalty that a growing number of lawmakers say does far more harm than good. Here is what is at stake and why Congress may finally…
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Social Security serves as a financial lifeline for many older Americans today. But some retirees can’t get by on those benefits alone and don’t have savings to supplement their monthly checks. That’s where part-time work comes in.
Seniors are allowed to work while collecting Social Security. But those who are in that situation prior to reaching full retirement age (FRA) face a steep penalty for earning too much.
Some lawmakers are seeking to change that policy. And if they succeed, it could make it easier for Social Security recipients to boost their income by working.
How Social Security’s $1-for $2 penalty works
Social Security recipients who haven’t reached FRA are subject to an earnings test if they work. The amount of money they can earn each year changes. But exceeding whatever the annual limit is results in having $1 in Social Security withheld per $2 of earnings.
In 2026, the earnings test limit for workers who won’t reach FRA is $24,480. Once wages exceed that limit, $1 in Social Security is withheld per $2 of earnings.
Withheld Social Security benefits aren’t forfeited permanently. Once FRA arrives, that money is repaid in the form of larger checks.
But while withheld benefits aren’t a total loss, losing that money temporarily hurts many seniors. That’s why some lawmakers want to see the earnings test go away.
The Senior Citizens’ Freedom to Work Act comes to the rescue
Introduced earlier this year, the Senior Citizens’ Freedom to Work Act seeks to do away with the Social Security earnings test. Those opposed to the earnings test call it “a bureaucratic hurdle that does more harm than good.”
Social Security’s earnings test was implemented during the Great Depression. Back then, the goal was to push older Americans out of the workforce in order to free up more jobs for younger people.
But today’s economy is different. And we have a labor force that can support older workers and younger ones at the same time.
Those who are against the earnings test argue that not only does it needlessly limit seniors who want to earn money, but it might also discourage workforce participation altogether, which is bad for retirees’ health as well as Social Security itself.
For many older Americans, part-time work can be a source of social connection. Working can also help seniors keep their minds sharp, potentially staving off certain health issues. Making work less accessible by having an earnings test is therefore not a positive thing at all.
Plus, Social Security itself is funded primarily by payroll taxes. Removing barriers to earning wages could pump more money into Social Security, potentially helping the program stave off benefit cuts or at least help minimize them.
For now, make sure you know the rules
If you’re planning to work while collecting Social Security and you haven’t yet reached FRA, it’s important that you understand how the earnings test works. And remember, the amount of money you can earn under it changes yearly, so be on the lookout for an update in 2027.
Also keep tabs on how the Senior Citizens’ Freedom to Work Act progresses. Though it’s not a law as of now, if it gains enough traction, it could result in a very positive change to Social Security.
Contact [email protected] for any questions or corrections.
Maurie Backman has more than a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate. Her work has appeared on sites that include The Motley Fool, USA Today, U.S. News & World Report, and Kiplinger.
Prior to becoming a full-time financial writer, Maurie worked in the financial industry trading distressed debt. She then changed course and spent a few years designing electronic toys. After a stint in content marketing and UX, she shifted back into writing and has since covered everything from the housing market to estate planning to Medicare.
When she's not busy writing, Maurie can be found hiking, walking her dogs, driving her kids to their various sports practices and games, and curling up with a good book. She cooks on occasion and bakes way too often.
