Social Security Earnings Penalty
The Social Security earnings penalty refers to a temporary reduction in your Social Security benefits if you claim benefits before your full retirement age (FRA) and continue to work, earning above certain limits. This is also called the "Earnings Test."
For instance, if you stop working entirely before claiming Social Security, you may avoid the earnings penalty altogether, provided your earnings for the year remain under the set thresholds.
The Earnings Penalty applies to people who claim Social Security before their full retirement age (FRA) (which is between 66 and 67, depending on your birth year) and continue to work and earn income.
However, if you completely stop working and your earnings remain below the threshold, the penalty does not apply.
The earnings limits and benefit reductions end in the month in which you reach your full retirement age.
| Annual Limit | Monthly Limit | Penalty |
Before Full Retirement Age | $23,400 | $1,950 | Lose $1 for every $2 over the limit |
Year you reach Full Retirement Age | $62,160 | $5,180 | Lose $1 for every $3 over the limit |
Any year after you reach FRA | None | None | None |
If you cease working entirely before claiming, these thresholds become less relevant, as no penalties apply without earned income.
Special Rule For First-year Retirees
This rule is designed to help people who retire mid-year and begin collecting benefits before full retirement age (FRA) — especially if their earnings earlier in the year exceed the annual limit. It applies only to the first year you retire and claim Social Security before FRA. Essentially, instead of applying the annual earnings limit, the SSA uses a monthly earnings test for the rest of that year.
Additionally, the Social Security Administration considers your total earnings for the calendar year even if you stop working mid-year. This means earnings prior to claiming can also contribute to a penalty.
Under this rule, you can get a full Social Security benefit for any whole month you are retired and earnings are below the monthly limit of $1,950 per month. (This is 1/12 of the ~$23,400 annual limit.) So, if in the months after you retire, you earn less than $1,950/month, you can still receive full benefits for those months — even if your total annual earnings exceed the limit.
Example: Suppose Sally retires on September 30, 2025, at age 63. She earns $50,000 through September but earns $1,950 per month or less in October through December.
Sally should also consider her year-to-date earnings prior to retirement, as those will count towards the annual threshold.
In this case, Sally would receive her Social Security benefits for October through December, even though she earned more than $23,400 for the year. Beginning in 2026, only the annual earnings limit would apply.
* This exemption is not currently in place in the software. If you select to claim Social Security prior to your FRA and have work income, your Social Security income may be reduced. To compensate, you may want to add a stream of Pension Income.
NOTE: This penalty is not permanent
Once you reach your FRA, Social Security recalculates your benefit and adds back the months they withheld. This means you'll eventually recoup the lost benefits over time if you live long enough.