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Social Security Income Limit
 
The Earnings Limit was included into the original Social Security program when it was created during the Great Depression. The earnings limit decreases Social Security benefits when a beneficiary's labor income exceeds a certain threshold, called the exempt amount. This discriminatory clause was designed to combat high unemployment (25% at its peak) by encouraging older people to leave the workforce so jobs would become available for younger workers. The earnings limit applies only to wage and salary income above the exempt amount; it does not apply to pension, dividend, or interest income that may exceed the exempt amount, because the FICA tax is paid only on work. The exempt amount is indexed to wage growth.

Until the law was changed in 2000, the earnings limit reduced the Social Security benefit by one of two calculations, depending on the age of the beneficiary.

      • For ages 62-64, the Social Security Administration withheld $1 in benefits for every $2 in wages earned above the exempt amount.
      • For ages 65-69, $1 was withheld for every $3 in wages above the exempt amount.

The 50-cents-on-the-dollar benefit reduction for ages 62-64 is still in place, while the earnings limit has been lifted for age 65 and over starting in 2000.

Although it is not well understood, individuals who obtained reduced Social Security benefits because of the earnings limit will ultimately recapture all of their lost benefits after they reach the normal eligibility age for full benefits, and if they live long enough. The period required for full recapture of benefits is computed actuarially. Thus, the earnings limit is similar to a program of compulsory saving more than it does a tax, although whether this forced saving is efficient can be debated. The recapture feature may be discriminatory to certain income or racial groups that tend to have shorter life spans.

For 2004, the Social Security earnings limit for self-employed workers is $87,900, the same limit that applies to employees. The earnings limit means only the first $87,900 of your net business earnings (combined with your wages and tips if you have another job) is subject to the Social Security tax. The earnings limit is adjusted annually to reflect inflation. Regardless of how much you earn, all of your earnings are subject to the 2.9 percent Medicare part of the self-employment taxes.

Today, many sectors of the economy are experiencing a labor shortage. In fact, the Bureau of Labor Statistics reports that our 4.2% unemployment rate is the lowest we have seen since 1969. Providing incentives for seniors to rejoin the workforce could have a positive economic impact. One study has estimated that elimination of the Earnings Limit would meet the need of almost 31,500 full-time jobs by 2008.
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