Time to Eliminate the Inequity
Retirees between the ages of 65-69 who continue to work will get a break this year on the Social Security penalty they are assessed if they earn more than the law allows. Up to now recipients had to give up $1 in Social Security payments for every $2 they earned beyond $8,800. This year retirees in the affected age group can earn up to $9,360 without loss of benefits and will face a penalty of $1 for every $3 they earn beyond that amount. That’s helpful, but it still leaves a basic inequity in place. Retirees 70 and older are allowed to earn as much as they can with no loss of Social Security benefits. Why penalize younger retirees at all?
The earnings penalty has become both a social anachronism and a drag on the economy. It originated as a job-creating mechanism, aimed at encouraging older workers to retire to make way for younger entrants into the labor force. But what the nation faces today isn’t a surplus of workers but a shortage, especially when it comes to skilled and experienced workers. It’s hardly sound social policy to require these workers to forfeit benefits that they are entitled to if they choose to work more than just a few days a week.
The inequity for those who retire before the age of 65 remains even worse. They can’t make more than $6,840 before the earnings penalty kicks in, and they will continue to see their benefits reduced by $1 for every $2 they earn beyond that amount. Note that in all cases the penalty is applied only when permissible earned income ceilings are exceeded. A retiree who doesn’t earn more than $9,360 can enjoy a limitless amount of investment or pension income without any loss of Social Security benefits.
The Social Security Administration calculates that about 750,000 people are penalized with reduced benefits each year because they earn more than the law allows. What stands in the way of greatly liberalizing or, better yet, removing the earnings limits? Some people in government worry that eliminating the penalty would raise Social Security payouts and so--on paper at least--boost the budget deficit. That’s bureaucratic shortsightedness at its worst. This year the wage base for Social Security taxes rises to $51,300, meaning among other things that the more a working retiree is allowed to earn the more that worker and his or her employer will pay in Social Security taxes. Additionally, of course, the earned income of retirees is subject to income taxes, a gain rather than a loss so far as the budget deficit is concerned. Congress has pondered removing the earnings ceiling for some time. This is the year for action.
