THE SOCIAL SECURITY TAX EARNINGS TEST
An ancient 1935 animal, thought extinct, roams the halls of congress
The United States Congress has become a slow, lumbering beast. It is a political INCOMETAXOSAURUS, trapped in the tar pits of congress, stubbornly refusing to evolve even as the modern economic climate changes around it. This total evolutionary paralysis is nowhere more obvious, or more destructive, than in the prehistoric, fossilized remains of our Social Security system.
Once again, Congress sits completely frozen in time. It is desperately protective of an ancient, extinct law that belongs buried in a dinosaur quarry, forcing modern American workers to rely on a fossilized structure that should have died out ages ago.
To understand how we arrived at this impasse, one must look back to 1935. Washington was in the grip of the Great Depression. The architects of Social Security designed the system not as a universal pension, but as an emergency safety net for a desperate nation. Labor markets were choked. Millions of young men were looking for work. The legislative fix was calculated and blunt: penalize older Americans who wanted to stay on the job. The Earnings Test was invented to force seniors out of the workforce, voting seats for the next generation.
That was ninety-one years ago. The world has changed. The economic reality has entirely reversed.
Today, retirees are younger in body, brain and spirit. The American economy is not suffering from a surplus of workers, but a desperate shortage of seasoned, skilled labor. Yet, the law remains frozen in amber. If an early retiree chooses to launch a second career, consult, or return to public service, the federal government steps in to punish their productivity. For every two dollars earned above a $24,480threshold, the Social Security administration claws back a dollar in benefits.
The penalty falls with a double weight on our retired federal civil servants. Under the Federal Employees Retirement System, early retirees who receive the Special Retirement Supplement find themselves trapped in the exact same 1930s dragnet. They have decades of institutional knowledge, energy, and a desire to contribute. Yet, if they take a secondary career, the Office of Personnel Management docks their supplement. It is a government actively sabotaging its own workforce.
The tragedy of this congressional paralysis is that the solution is staring at lawmakers directly in the face. Proponents of reforming this relic, rallied around the recently revived Senior Citizens’ Freedom to Work Act, have laid out a compelling, common-sense case.
If Congress were to repeal the “Tax Earnings Test”, it would unlock an immediate economic windfall. Freed from the penalty, hundreds of thousands of healthy, experienced retirees would rejoin the active labor market. They would not be drawn down on the system in secret; they would be paying into it. The math is as simple as it is devastating to the defenders of the status quo. These working seniors would pay federal income taxes. More importantly, they—and their new employers would contribute a combined 12.4 percent in payroll taxes directly back into the system.
Actuaries at the Social Security Administration have looked at the data. The numbers suggest that removing the test would have a net neutral or outright positive effect on the long-term solvency of the Social Security Trust Funds. It is a rare Washington trifecta: it helps the worker, boosts the economy, and shores up the fiscal foundation of the safety net itself.
We have seen this proof before. In 2000, Congress modernized the law just enough to eliminate the earnings test for those who had reached full retirement age. The sky did not fall. Instead, senior employment surged, and tax revenues followed.
Yet we sit here. The bill to finish the job gathers dust in committee rooms, stalled by timidity and the slow-moving gears of partisan inertia. Leadership looks the other way, preferring to debate partisan talking points rather than execute structural repairs to a trust fund creeping closer to insolvency.
The American worker has evolved. The economy has transformed. It is high time the United States Congress woke up to the current century, cast off the dinosaur of 1935, and repealed a law that penalizes the very work ethic that built the nation.
George Shipe is a Senior Vice President of National Benefit Advisory, Inc, Seattle, WA. and a certified Federal Employee Retirement Consultant, with Federal Benefit Advisory, Seattle, WA
