Not long ago, a viewer on my YouTube channel asked me to give her a good reason why we have the Social Security earnings limit. The comments that followed showed how many viewers shared the belief that the earnings limit is unfair and should be eliminated.
In my response, I explained that the rationale behind the entire program of Social Security was a safety net. The original intent of the Social security program was not to supplement retirement income, but to keep the elderly (most of whom lost any potential long-term wealth in the Great Depression) out of poverty.
I also added that today’s earnings limit is relatively generous compared to where the Social Security earnings limit began. Let’s take a walk through history and see how the earnings limit has evolved.
Understanding the Origins of the Social Security Earnings Limit
The original Economic Security Bill which is what the Social Security Act was originally called) President Roosevelt sent to Congress featured a very restrictive earnings limit.
It said, “No person shall receive such old-age annuity unless . . . He is not employed by another in a gainful occupation.”
Whoa! This means that if you had even a single dollar in wages from a job, you could not collect a Social Security benefit at all.
The Bill reached Congress and then made its way into the House Ways and Means Committee. After holding hearings, committee members suggested dropping the retirement earnings test — but the Senate Finance Committee ultimately decided that the earnings limit should remain.
Eventually, the House version without the earnings limit passed by a vote of 372 to 33. The Senate version with the earnings limit passed by a vote of 77 to 6. After a couple more months of wrangling over details, the government signed the final version of the Bill featuring the earnings limit into law.
The final version of the Social Security Act of 1935 contained this language on the subject:
“Whenever the Board finds that any qualified individual has received wages with respect to regular employment after he attained the age of sixty-five, the old-age benefit payable to such individual shall be reduced, for each calendar month in any part of which such regular employment occurred, by an amount equal to one month’s benefit.”
(Keep in mind that age 65 was the earliest age of eligibility during the first few decades of Social Security.)
Over the next few years, lawmakers realized they needed to make the term “regular employment” more clear and better defined. In the 1939 amendments to the Social Security Act, they defined “regular employment” as having earnings of less than $15 in one month.
How the Earnings Limit Evolved Over Time
By the late 1940s, post-WWII wages rose and the $15 earnings limit became outdated. In the 1950, lawmakers passed more amendments that eliminated the retirement test for applicants at age 75. They also increased the earnings limit from $15 to $50.
The 1950s also saw the vast expansion ofSocial Security, and an additional 10 million people, including many self-employed individuals, gained Social Security coverage.
The earnings test for the self-employed was set at $600 per year initially, but in 1952 that jumped to $900 per year. Meanwhile, the earnings test amount also increased for employees, from $50 to $75.
The 1954 amendments reduced the age where the earnings test no longer applied from 75 to 72. The differences between wage earners and self employed were also made uniform with an annual earnings test.
Up until this point, wage earners faced a monthly test but self-employed individuals had an annual limit of $900. With the new law, the earnings test would only apply if earnings exceeded $1,200. Then, for every $80 increment, one month’s benefit would be withheld.
Further Changes to the Earnings Test through the 1960s and 1970s
The 1960 amendments introduced the phase-in earnings limit where an individual could still exceed the limit without a total loss of benefits.
For earnings between $1,200 and $1,500, the reduction was $1 for every $2 of earnings. For earnings over $1,500 the reduction amount would be dollar for dollar.
From this point forward, the earnings limit used this phase-in approach. The 1961 amendments increased the upper limit to $1,700 from $1,500 while the 1965 amendments changed this range again.
Recipients could then earn up to $1,500 a year and still get all their benefits. If, however, earnings exceeded $1,500, $1 in benefits would be withheld for each $2 of annual earnings up to $2,700 and for each $1 of earnings thereafter. The 1967 amendments modified this range from $1,680 to $2,880.
The 1972 amendments modernized the method used to determine the earnings limit. Previously, only an act of Congress could mandate an increase in the earnings limit amounts. The 1972 law put the increases “on automatic” by tying them to increases in the average wage index. This became effective in 1975.
From 1977 to Now: The Modern Way the Earnings Limit Evolves
The 1977 amendments earnings limit changes focused on allowing older Americans to access much-needed Social Security benefits to supplement their retirement incomes.
The House passed a bill eliminating the earnings limit at age full retirement age. The Senate passed a similar bill, but it didn’t eliminate the earnings limit until age 70. Ultimately, the conference committee accepted the Senate position and the final legislation ended the earnings limit at age 70 (but it didn’t officially come into effect until 1983).
The 1977 amendments also separated those who were under full retirement age and those who were over full retirement age. They granted a more generous earnings limit of $6,000 annually for those who were are or above full retirement age.
In the 1983 amendments, lawmakers expanded this by not only giving those above full retirement age a higher earnings limit, but also decreasing the amount of withholding by reducing the withholding to $1 for every $3 over the limit. Even though this change was legislated in 1983, it went into effect in 1990.
The next major change introduced the earnings limit as we know it today. The Senior Citizens Freedom To Work Act of 2000 permanently ended the earnings limit at full retirement age and increased the amount an individual can earn in the calendar year they attain full retirement age.
Since 2000, except for the annual increases, the earnings limit has been unchanged. As you can see from the timeline above, this is the longest period the earnings limit has ever gone without substantial changes.
Part of that is due to the automation of the increases by tying in with the annual changes in average wages, but there has been some talk about the earnings limit being one of the fixes for the pending shortfall in the Social Security trust fund.
The argument is that the earnings limit could be reinstituted for any ages if their income exceeded certain thresholds. This would be the “means testing” that would exclude high income individuals from drawing a Social Security benefit. That may never happen, but the framework certainly seems to be in place for those with high income — even if they’re above full retirement age.
Whatever changes come, I’ll be sure to keep you informed! You can keep up with me on my YouTube channel the other projects I’m involved with.
Also, be sure to get your FREE copy of my Social Security Cheat Sheet. This is where I took the most important rules and things to know from the 100,000 page Social Security website and condensed it down to just ONE PAGE! Get your FREE copy here.
If you want to read more on this subject, check out these resources below.
POMS chart showing all different calcs https://secure.ssa.gov/poms.nsf/lnx/0302501001
Major changes by year here https://www.ssa.gov/history/reports/crsleghist2.html
SSA ET History https://www.ssa.gov/history/ret.html