FERS retirees who retire at their minimum retirement age (MRA) face an earnings test on part of their retirement income for a period of 10 or 11 years.
For most current FERS employees, the MRA is age 56 or 57 and, if they have completed 30 years of federal service by reaching that age, they are eligible to voluntarily retire upon attaining their MRA. Someone who earns money over and above the earning limit will lose money from their Retiree Annuity Supplement (RAS) from their MRA to age 62, and from their Social Security from age 62 until their Social Security full retirement age (FRA), which is generally 66 or 67.
The 2019 Earnings Tests
Both OPM (for the supplement) and Social Security expect you to file an earnings report if you work while subject to the earnings test. The 2019 earnings tests are:
- From your FERS MRA until the year in which you reach your Social Security FRA, your supplement or your Social Security will be reduced by $1 for every $2 your income exceeds $17,640 ($1,470 per month).
- In the year in which you reach your Social Security FRA, the reduction is $1 for every $3 your income exceeds $46,920 ($3,910 per month).
- There is no earnings test beginning the month in which you reach your Social Security full retirement age.
The test is adjusted annually for inflation and is prorated (i.e., applied monthly) in the year you apply for Social Security.
When it comes to Social Security, if you make enough money to lose benefits due to the earnings test, the loss of benefits is only temporary. Once you reach your full retirement age, Social Security recalculates your benefit and increases your monthly payment so that, over your projected lifetime, benefits that were forfeited to the earnings test will be repaid.
What Type of Income is Included?
Many of the participants in my pre-retirement classes get confused as to what type of income is included in the earnings test. Not surprising – the tax code is designed to confuse; some of us back at the IRS referred to the Internal Revenue Code as the “Attorneys’ and Accountants’ Full Employment Act”.
To be clear, the earnings test applies only to earned income, not annuities, gifts and other items. Earned income is money that you make by working. Social Security has a clear and simple definition of earned income: “gross wages or net self-employment income”. Your FERS pension, TSP distributions and money from investments are not considered earned income; neither is any lump sum annual leave payment you might receive upon retiring.
Those who will be retiring before their Social Security full retirement age need to be aware of the earnings test and plan accordingly.