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Working past retirement age impacts taxes, benefits
Scripps Howard News Service


February 04, 2006

Older workers who are considering phasing into retirement have other financial concerns to take into account besides collecting a paycheck and a pension, starting with what working will do to their Social Security benefits and tax bill.

Congress and President Clinton changed the law in 2000 so people 65 and older who want to continue working can collect their Social Security benefits in full.

Collect Social Security at 62 or older but less than the full retirement age for your age group, however, and you still face an "earnings test" that cuts Social Security benefits $1 for every $2 in pay above a threshold that is set yearly and is $12,480 this year.

Under changes to Social Security law that Congress and President Reagan made in 1983, the system's full retirement age is already rising:


1937 or earlier ... 65

1938 .............. 65 and 2 months

1939 .............. 65 and 4 months

1940 .............. 65 and 6 months

1941 .............. 65 and 8 months

1942 .............. 65 and 10 months

1943-1954 ......... 66

1955 .............. 66 and 2 months

1956 .............. 66 and 4 months

1957 .............. 66 and 6 months

1958 .............. 66 and 8 months

1959 .............. 66 and 10 months

1960 or later ..... 67

As the full retirement age for Social Security rises, reduced benefits for early retirees get stretched out over more years. Check the Social Security Administration's online calculator at to see how early-retirement benefits versus full benefits work out, based on your earnings history.

The year your reach your full retirement age, $1 is deducted from Social Security benefits for every $3 earned up to a different yearly limit, but only for the months before your birthday. The annual limit is $33,240 for 2006. Note that investment, pension and inheritance income do not count, and neither do IRA distributions.

Atop the earnings test, there's a good chance your Social Security benefits will be taxed if you elect to draw benefits before you stop working. A further wrinkle is that those tax thresholds haven't been adjusted to account for inflation in 23 years.

Social Security wasn't taxed at all from the program's inception in 1935 until 1983 "because payments were so small when the program started that it wasn't worth the administrative cost to tax them," says the Urban Institute's Rudolph Penner.

But with Social Security payments becoming substantial by the 1980s, Congress agreed as part of that 1983 Social Security rescue plan to subject its retirement benefits to taxation above a set threshold for higher-income seniors, recalls Penner, who headed the Congressional Budget Office back then.

Since that 1983 law change, tax on Social Security benefits has been triggered whenever a senior's income reaches $25,000 for single filers, or $32,000 for couples who file jointly. Fifty cents of every $1 of Social Security retirement benefits above those thresholds is considered taxable, added to adjusted gross income from wages, pensions and investment income including tax-free bonds, and taxed at the individual's income-tax rate.

AARP economic affairs director Evelyn Morton says Congress ordered taxes on Social Security benefits to go back into the Social Security trust fund to shore it up and made a conscious decision not to adjust the thresholds for inflation. The goal was to encourage older workers drawing a paycheck to delay getting Social Security, too.

She adds that, in 1993, Congress added a second threshold of $34,000 for singles, or $44,000 for couples, above which 85 cents of ever $1 in Social Security benefits is added to other income and taxed at the appropriate rate, with those tax proceeds going to Medicare hospitalization insurance funding.

Efforts by some lawmakers to adjust those thresholds for inflation have gone nowhere, although President Bush's tax reform panel recently revived the idea along with streamlined tax treatment of Social Security benefits.

Financial planner Eric Tyson, co-author of "Taxes 2006 for Dummies," suggests Social Security recipients nearing earnings-test or tax thresholds "take a vacation" from work rather than have their paycheck cost them benefits or tax them away. Alternately, financial counselors advise: Don't draw Social Security until you stop getting a paycheck.

Older workers who delay drawing Social Security get a bigger check when they do. Fidelity Investments calculates today's 55 year old worker making $75,000 a year, and with a hypothetical earnings history, would get initial Social Security benefits of $15,919 at 62 and $21,226 on reaching 66, defined as full retirement age for someone 55 today. Wait until 70, and that worker stands to collect first-year benefits of $28, 018.


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Ketchikan, Alaska