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The messiest Social Security rule ever

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POSTED August 16, 2013 10:27 p.m.

If someone would appoint me the "Master of the Social Security Universe," or give me some other appropriate title that would allow me to change any law or regulation on Social Security's books, I would immediately get rid of the earnings penalty provisions of the law. These are the rules that limit the amount of money a Social Security recipient under the age of 66 can earn if he or she is working while collecting benefits.

These rules confuse almost every Social Security beneficiary. And worse yet, they are a nightmare for the government to administer. Because of the messy rules, millions of Social Security recipients are being either overpaid or underpaid every year. And once you fall into the overpayment/underpayment trap, it can be years before your benefits are straightened out.

And this has been going on for decades now. I remember trying to explain the complex rules to perplexed beneficiaries back in my early years of working for the Social Security Administration. At the time, my mother was getting Social Security benefits and was working part time on the side. And she, too, was always getting either too much or not enough in her Social Security checks. And I used to tell folks this: "If I can't keep my own mother's Social Security straight, how do you expect me to help you?"

Before I give an example of how messy these rules can be to administer, let me give you an overview of the earnings penalty sections of the law.

The government calls these provisions the "retirement test." And that's because it was supposed to be a test of someone's retirement status. Simply put, Social Security rules have always said that a person must be retired to collect retirement benefits. (But please note the same rules also apply to people who get Social Security dependents or survivors benefits — like widows, for example.)

But from the beginning of the program, Congress decided that people should be able to work and earn a little bit of money and still get benefits. In the very earliest days of Social Security, the earnings threshold was set at $50 per month. But over the years, the rules have been both liberalized, and in the process, made much more complicated.

The earnings threshold changes every year, but today, the rules say this: If you are under your full retirement age, you can get all your Social Security benefits if you are working and keep your annual earnings under $15,120. If you exceed that threshold, one dollar must be withheld from your Social Security checks for each two dollars you make over the limit. That may sound simple enough. But I am going to give an example of how that relatively simple-sounding law leads to so much confusion and so many administrative headaches.

Let's say Stan filed for Social Security benefits at age 62 and started getting $1,700 per month. When he turned 63, he decided to return to work. He was aware of the $15,120 limit and was determined to keep his income under that amount so he would have no problems with his Social Security. But as time went on, he ended up working more hours and even earned some overtime. He now estimated he'd make $18,000 for the year. So he reported that to SSA and they sent him a letter telling him that they would withhold $1,440 from one of his Social Security checks. ($18,000 is $2,880 over the $15,120 threshold. One half of that, or $1,440, must be withheld from his Social Security.)

But by the end of the year, Stan realized that the $18,000 estimate he gave to Social Security officials was low. When he got his W-2 form at the beginning of the following year, he learned that he actually made $19,000. That was $1,000 more than he had reported to SSA, meaning he owed them half of that, or another $500.

So he took his W-2 form to his Social Security office. They set up their computers to hold back that extra $500. But at the same time, they asked for an estimate of his anticipated earnings for the current year. Stan told them he thought he would make the same as last year: about $19,000. So in addition to recouping the $500 overpayment for the prior year, they also set in motion the process of withholding another $1,940 for his excess earnings for the current year. But then if history repeated itself and Stan's estimate of $19,000 in earnings turned out to be too low, he would once again be overpaid in Social Security benefits.

Do you see where I am going with this? The process of paying some benefits and withholding other benefits and recouping overpaid benefits just continues to compound itself. As I said, it is totally confusing to Stan, and it is an absolute nightmare for Social Security officials to administer.

And I haven't even gotten into a special rule that applies to a person's first year of retirement; and another special rule that applies to the year a person turns age 66.

One reason Congress doesn't simply eliminate the earnings penalty is because of the costs. Billions of extra dollars in Social Security benefits would have to be paid each year to working beneficiaries. To prepare for the onslaught of baby boomer retirees, Congress is looking for ways to trim benefits, not expand them.

I have written a fact sheet that explains the earnings penalty provisions of the law in as simple a way as I know how. So if you are a Social Security beneficiary who is under the age of 66 and working part time and think you may exceed the earnings penalty thresholds, send an email to me at and ask for a free digital copy of "Working After Retirement and the Earnings Penalty."


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