Updated: 7/25/2012 2:37 PM ET|
The Social Security Catch-22
If you claimed retirement benefits early but were forced back to work by an uncertain economy, you might be in for an unpleasant surprise.
It sounds like a cruel joke.
After a lifetime in the work force, you call it quits at 62 to claim Social Security benefits and begin a long and satisfying retirement.
Then, the worst economic calamity since the Great Depression hits with the vengeance of Hurricane Katrina, decimating your nest egg and depleting the value of your home. Faced with the painful reality that you must go back to work, you count yourself lucky to find a job at a time of high unemployment.
And your reward? The federal government suspends your Social Security benefits.
Say hello to the confusing and controversial Social Security earnings test. This provision of the law says sure, you can claim your benefits as early as age 62, but you can't necessarily keep the cash if you work before reaching your normal retirement age (66 for workers born in 1943 through 1954).
The earnings test cost a quarter of a million working Social Security beneficiaries about $100 million each month in 2009, according to a ballpark estimate Social Security officials made for Kiplinger.
No one knows how much of that figure is a result of retirees being forced by deteriorating finances to go back to work. But it's clear that anyone who claims Social Security benefits early -- or who's thinking about it -- needs to understand what's going on here.
And that includes the increasing number of 62-plus men and women who have lost their jobs and, as they've struggled to find new ones, have filed for Social Security early to pay the bills until they can restart their paychecks. There's been a big jump in the number of Americans claiming benefits early since the recession began driving unemployment higher.
How the earnings test works
If you apply for Social Security benefits early, you'll be asked whether you plan to keep working and, if so, how much you expect to earn -- to determine whether you'll be stung by the earnings test.
For 2012, the test applies if you make more than $14,640. And for every $2 you earn over that limit, you'll lose $1 of benefits. 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 $15,360 over the limit, you would lose half of the excess, or $7,680, in benefits.
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 $180 claimed by the earnings test, or $1,320.
In the year you first claim benefits, the test basically lets you ignore money you made before you applied and squeezes benefits based on monthly earnings for the rest of the year. In the calendar year you reach normal retirement age, a more lenient earnings test applies: You lose $1 for every $3 in earnings over $38,880 before your birthday. Starting in the month you reach normal retirement age, there's no earnings test. You can earn as much as you want without losing a dime in benefits.
Note: For purposes of the earnings test, only wages from a job or self-employment income count. Investment earnings, pension benefits, money drawn from an individual retirement account or 401k, or even lottery winnings do not.
More from Kiplinger's Personal Finance magazine:
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- Quiz: How well do you know Social Security?
Not the honor system
Although you will be asked to estimate your earnings, your projection isn't the final word. When you file your tax return, the Internal Revenue System lets the Social Security Administration know exactly how much wage and self-employment earnings you report.
That figure is compared with your estimate, and the government reconciles the books by either sending you a check -- if your estimate of earnings was too high and the earnings test clawed back too much of your benefits -- or dunning you for a balance due.
This final point is particularly important if you unexpectedly return to work while you're subject to the earnings test. You should let the Social Security agency know of the change in circumstances as soon as possible so that your benefits can be trimmed if you run afoul of the earnings test. Failing to do so could come back to haunt you later. If the tax return you file shows earnings that should have triggered reduced benefits, you'll be asked to pay back the excess in a lump sum or see future benefits reduced.
A silver lining in the earnings test
Although the earnings test is often derided as an unconscionable 50% surtax -- because $2 in earnings can cost you $1 in benefits -- it's not as evil as critics complain. 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.
Remember, if you claim benefits before your full retirement age, your benefits will be permanently reduced (see the table below). But for any month you lose benefits to the earnings test, the Social Security agency will ratchet up future benefits.
Say you retire at 62, happy to accept the 25% haircut 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. Basically, when recalculating your benefits at your full retirement age, you'll be treated as though you claimed benefits three years early, not four. Instead of having your lifetime benefits reduced by 25%, in this example you'd suffer about a 20% 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.
The earliest age for full benefits
Through most of Social Security's history, 65 was the magic age. Claiming retirement benefits before then -- and you can start as early as age 62 -- meant accepting a lifetime reduction in benefits.
For folks retiring this year, though, the magic age is 66. And the age at which you can start collecting benefits without being docked for starting early -- or being threatened by the earnings test -- is increasing.
|Birth year||Full retirement age||Cut in monthly benefits if claimed at 62|
|1955||66 and 2 months||25.83%|
|1956||66 and 4 months||26.67%|
|1957||66 and 6 months||27.5%|
|1958||66 and 8 months||28.33%|
|1959||66 and 10 months||29.17%|
More from Kiplinger's Personal Finance magazine:
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I retired the day I turned 62 in 2008. I was well prepared and knew of the 2 for 1 benefit clause .
For 95% of the people who went back to work due to the down turn they simply didn't do their homework. The ratio of assets to retirement spending at age 62 is 9 to one. If you spend 52,000 plus pay the taxes you needed 500,000 in assets (do not count the equity in your home as an asset) according to fortune magazine only 200,000 people a year have achieved that number. The rest need to work smarter not harder. and for about 25% of the baby boomers who now realize the word retirement is not in their future. I hope they enjoyed the fancy cars and vacations when they had them
Why don't we know the rules for almost any process? Social Security publishes the rules. Reading comprehension must be at an all time low. Maybe it's financial illiteracy. These types of articles are published over and over.
If you are not comprehending some big event in our life, go ahead and talk to the idiot neighbor for advice because to read confuses but the spoken word is comforting.
You want to privatize the system? Go back and figure what you paid in taxes to Social Security over your work life. Then put that money in a theoretical 401(k). Put it in before 1999, and watch your money disappear in the dot com bust. Then it builds back up, but watch it disappear again in 2008. Is that what you want?
I'm 67, and haven't filed for benefits yet. I have to work, so there's no point in collecting yet. And for every year after 66 that I don't get a social security check, the amount of my check increases by 8%. Try getting that kind of payback with your 401(k)!
I am 50 years old and just went on-line to look at my ssn statement. It says I have paid in over 190K over my working career. Since I paid in that amount I feel I should get a return on it regardless of whether I continue to work or not. Banks/investment firms don't rate your returns on the income you are bringing in. As for those who have paid in less, I think they will just sign-up for social programs (welfare/food stamps/etc) and probably get the same total amount as me when it all shakes out. It just seems like "fuzzy math."
Here is my suggestion: Let Warren Buffett or Peter Lynch have a crack at the budget. Betcha one of those fellows balance it within a year.
Have a good day and keep your karma clean!
Keep your dirty, rotten, thieving hands off my Social Security...IT'S MINE !!!
Social Security is indeed an entitlement. If you have contributed for 40 quarters and are 62 or older, you are entitled to receive Social Security payments, and those who have applied for SS payments since 1994, must be an US Citizen or lawful resident alien. (There are some exceptions for the disabled and spousal and children survivors if the worker dies)
An entitlement is really just a term for any government program guaranteeing certain benefits to a segment of the population. These benefits are enforceable in court.
Social Security has nothing to do with whether recipients are deserving or needy or rich as Donald Trump.
The man strikes again! One more reason to privatize a decaying process and permit the individual to invest as sees fit. Me, I'm gonna invest in GE. As much as I am disgusted by their tax avoidance antics, they did stick it to the man. Now if I tried that......
I tried to find a way to help them so they could still make some extra money (considering the economy and their age) but I failed short in most conventional ways. At the end all I could come up with was online surveys. I'm glad I did. My inlaws now manage to make easy $200 each month on the internet using their free time. There is lots of info sites that will explain and guide anyone interested. I understand $200 is not much for most of us but its quite easy to get and anyone can do it without a need to leave their home. If you know anyone that could benefit from it you should let them know, I myself had no idea that this thing is for real until just recently. I used a website called Surveyjet.netwhere they show images of checks and invitations from different survey sites (so I knew it's all legitimate), but the web is full of information and all you need to do is type paid surveys and I'm sure you will find something interesting for yourself . Not many sites show real earned money so I liked surveyjet for that matter becouse other sites just say "...o it's all great, sign up" then you get spamed with offers, or they feature some model with hands full of $100 bills whitch means "o look, thats how much I got paid for making this picture"(smell fish for a mile!).
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