If you apply for Social Security benefits before your normal retirement age (66 for workers born in 1943 through 1954), you’ll be asked whether you plan to keep working — and, if so, how much you expect to make. How you answer will determine whether Uncle Sam reclaims some of your benefits.
For 2010, the so-called benefits test applies if you make more than $14,160; for every $2 you earn over that limit, you’ll lose $1. Suppose you claim benefits at age 62 and your monthly benefit is $1,500 (and you estimate that you’ll earn $30,000 during the year). Because $30,000 is $15,840 over the limit, you would lose half of the excess, or $7,920.
Recommended Stories
The Social Security Administration doesn’t trim each check by a proportional amount. Your benefits are withheld completely until the squeeze is satisfied. In this example, you’d get no benefits for five months (covering $7,500 of the lost benefits), and your benefit in the sixth month would be $1,500 minus the final $420 claimed by the earnings test, or just $1,080.
In the year you first claim benefits, the test basically lets you ignore money you made before you applied and squeezes benefits based on your monthly earnings for the rest of the year. In the year you reach normal retirement age, a more lenient earnings test applies before your birthday: You lose $1 for every $3 in earnings over $37,680. Starting the month you reach normal retirement age, you may earn as much as you want without losing a dime in benefits.
Note this: For purposes of the earnings test, only wages from a job or self-employment income count. Investment earnings, pension benefits, money drawn from an IRA or 401(k) and even lottery winnings do not.
Although the earnings test is often derided as unconscionable, it is not as evil as critics complain. That’s because benefits lost to the test are not gone forever. Instead, the law is designed to ensure that you recover any forfeited amount via higher monthly benefits later. Say you retire at 62 and accept a 25 percent cut in benefits in exchange for collecting four years early. Then you have to go back to work and wind up forfeiting 12 months’ worth of benefits. When recalculating your benefits at your full retirement age, you’ll be treated as if you claimed benefits just three years early, not four. So, instead of having your lifetime benefits reduced by 25 percent, in this example you’d suffer about a 20 percent reduction going forward.
And if your earnings during your period of forced re-employment are higher than one of the 35 years of earnings originally used by Social Security to compute your benefit, your monthly payments could rise even more.
Send your questions and comments to [email protected].
