98-789 EPW
Updated January 4, 1999
CRS Report for Congress
Social Security Earnings Test: Recent and
Proposed Changes
Geoffrey Kollmann
Education and Public Welfare Division
Summary
On September 26, 1998, the House of Representatives approved H.R. 4579, the
Taxpayer Relief Act of 1998, which would have increased the “exempt amounts” under
the Social Security earnings test — the amount of earnings Social Security recipients may
earn before their benefits are reduced — for recipients between the “full retirement age”
(currently age 65) and age 70. Their exempt amounts would have increased gradually
by higher amounts than under current law beginning in 1999, reaching $39,750 in 2008.
However, the Senate did not take up the bill, and the measure was not included in any
legislation passed by the 105
th Congress. This report will be updated periodically.
Background
With variations, the earnings test has been part of the Social Security program since
its beginning. It reduces the benefits of recipients who earn income from work above a
certain sum. The original rationale for the test was that, as a “social insurance” system,
Social Security protects workers from certain risks, among them the loss of income due
to their retirement, and therefore benefits should be withheld from workers who show by
their substantial earnings that they have not in fact “retired.”
In 1999, the law provides that recipients under age 65 may earn up to $9,600 a year
in wages or self-employment income without having their benefits affected. Those aged
65-69 can earn up to $15,500 a year. For earnings above these amounts, recipients under
age 65 lose $1 of benefits for each $2 of earnings, and those aged 65-69 lose $1 in benefits
for each $3 of earnings. The test does not apply to recipients over age 69, or to the
disabled.1 The exempt amounts rise each year at the same rate as average wages in the

1 However, in the disability program earnings above a certain amount indicate ability to engage in
“substantial gainful activity” (SGA) and therefore disqualify a person from receiving benefits. For
non-blind disabled recipients, that amount is set by regulation at $500 a month. Before enactment
of P.L. 104-121, SGA for the blind was tied to the monthly earnings test (the annual exempt
amount divided by 12) for those who have attained the full retirement age. P.L. 104-121 removed
(continued...)
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economy. Beginning in 2003, the full retirement age gradually will rise, reaching 66 in
2009 and 67 in 2027, and the minimum age for eligibility for the upper earnings test
exempt amount will rise accordingly.
Recent Legislation
The earnings test has always been one of the
Current

most unpopular features of the Social Security
Year
Law
H.R. 4579
program, and congressional proposals to liberalize
1998
$14,500
$14,500
or eliminate the earnings test have been perennial.
1999
15,500
17,000
In 1996, P.L. 104-121 included a measure to
2000
17,000
18,500
increase the earnings test limit, for those who have
2001
25,000
26,000
attained retirement age, over a period of 5 years,
2002
*30,000
30,000
reaching $30,000 in 2002. On September 17, 1998,
2003
*31,230
31,300
the House Committee on Ways and Means by a vote
2004
*32,463
34,000
of 23-15 approved H.R. 4579, the Taxpayer Relief
2005
*33,806
35,400
Act of 1998, among whose provisions was a
2006
*35,149
36,800
measure that would have increased the earnings test
2007
*36,604
38,350
exempt amount for recipients at or above the full
2008
*37,948
39,750
retirement age according to the schedule to the
*Projected
right. After 2008, the exempt amount again would
be indexed to wage growth. On September 26,
1998, H.R. 4579 was approved by the full House by
a vote of 229-195. However, the Senate did not take up the bill, and the measure was not
included in any legislation passed by the 105 Congress.
th
The increase in the exempt amount was projected to increase Social Security outlays
by $565 million over the next 5 years. To offset this cost, the bill provided that
recomputations of benefits due to earnings after full retirement age would be deferred by
one year. Under current law, a retired recipient’s benefits are based on the average of a
prescribed number of years of their highest earnings (35 years for those born after 1929).
If recipients continue to work after they become entitled to benefits, their benefits may be
increased if the new yearly earnings are greater than one of the years used in the initial
computation of their benefits. Currently, these recomputations are effective beginning in
the year after the year of such earnings. H.R. 4579 would have altered the law so that
these recomputations would be effective beginning in the second year after the year of the
earnings, effective for earnings after 1997. However, it exempted from this provision
recipients who have years of “zero” earnings used in their previous computation of
benefits. This provision would have reduced Social Security outlays by $570 million over
the next 5 years.
Effect on Recipients. Based on data from the Social Security Administration, each
year about 1.4 million recipients over age 65 receive recomputations of their benefits. Of
these it is estimated that 516,000 would have been exempt from this provision because
1 (...continued)
the linkage between the SGA level of the blind to the exempt amount for individuals who have
attained the full retirement age. Instead their SGA level continues as before (i.e., adjusted annually
to reflect growth in average wages — it is $1,100 a month in 1999).

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they have zero years used in the previous computation of their benefits. Of the remaining
920,000 who would have had the recomputation of their benefits delayed, 387,000 (42%)
are 66-69 (and thus could benefit from the increase in the earnings limit), and 534,000
(58%) are over age 69 (and thus could not benefit from the increase in the earnings limit).
It is estimated that initially about 580,000 recipients aged 65-69 would have been affected
by the increase in the exempt amount. The following tables compare how a recipient
would have fared in 1999 under current law and under H.R. 4579.
Age 65 in 1999:
Age 65 in 1999:
Current Law
H.R 4579
Earnings . . . . . . . . . . . $26,000
Earnings . . . . . . . . . . . $26,000
Exempt Amount . . . . . . 15,500
Exempt Amount . . . . . . 17,000
Difference . . . . . . . . . . . 10,500
Difference . . . . . . . . . . . . 9,000
Reduction in benefit . . . . . 3,500
Reduction in benefit . . . . . 3,000
(1/3 of difference)
(1/3 of difference)
Arguments for raising the earnings limit. Opponents of the earnings test
traditionally have maintained that it is unfair to senior citizens because it penalizes them
for working. They argue that the combination of the reduction in benefits and income and
payroll taxes impose very high effective marginal tax rates on working retirees.
Proponents of raising the exempt amount say that doing so would ameliorate the severe
disincentive the earnings test provides for retired beneficiaries who must work to
supplement their benefits.
Arguments against raising the earnings limit. Opponents of H.R. 4579 did not
specifically object to the earnings test measure during its markup. However, a similar
measure passed in the 104 Congress was critic
th
ized for the method used to pay for raising
the exempt amount, i.e., delaying recomputations of benefits for working retirees.
Because both these provisions affect working retirees, the effects can be uneven,
benefitting some and penalizing others. Also, as the two measures offset each other,
critics say it is a case of robbing Peter to pay Paul.