Flunking the Test

Richard Connor

I RECENTLY WROTE about how, if you claim Social Security benefits before age 66 or 67, your monthly check could be reduced if your earned income is “too high.” Shortly after the article appeared, I ran into a colleague who was struggling with the issue.

My colleague had retired a few years back. He thought there might be some opportunities to do part-time consulting with our old employer. But nothing came of it during the first year he was retired, so he claimed Social Security in 2020. Sure enough, several consulting opportunities almost immediately popped up. He quickly earned more than the minimum allowable amount under Social Security’s “earnings test” and there’s a good chance he’ll exceed his maximum allowable earnings for 2020. Result: He’ll lose much and perhaps all of his Social Security benefits for this year.

In 2020, the Social Security Administration (SSA) allows you to earn $18,240 before your benefit is reduced. If you earn more than $18,240, you lose $1 in benefits for every $2 you earn above $18,240. Once you reach your full retirement age (FRA), which is age 66 or 67 depending on the year you were born, you can earn any amount without a reduction in benefits.

My colleague’s question: Is there anything Social Security recipients can do if they claimed Social Security, only to discover they don’t need the extra income right now? It turns out the SSA provides two options, both tied to your age.

The first option is available if you haven’t yet reached your FRA and you’re in the first year of receiving benefits. If you meet both criteria, you can apply to Social Security for a “withdrawal of benefits.” Timing is key. Social Security will let you withdraw your original application for retirement benefits only once and it must be done within 12 months of the date you first claimed benefits. You fill out Social Security Form SSA-521 and send it to your local Social Security office.

If you request a withdrawal of benefits, Social Security will treat it as if you never applied for benefits in the first place. The catch: You must repay every dollar you’ve received. That includes your monthly retirement benefit, any family benefits and any money withheld from your payments, such as for Medicare premiums. If you’ve been receiving retirement benefits for more than a year, the window to apply for a withdrawal is closed.

While you’re requesting a withdrawal of benefits, you might also withdraw from Medicare, assuming you’re age 65 or older and you find yourself with a job offering health benefits. This would save you from paying Medicare premiums. But there are serious issues to consider, including the possibility that you’ll get hit with permanently higher premiums when you re-enroll. Contemplating withdrawing from Medicare? Please get expert advice.

That bring us to option No. 2, which is available once you reach your full retirement age. At that point, the Social Security earnings test no longer applies. Still, because you’re working or because you’ve had second thoughts about claiming benefits early, you might want to stop benefits.

To that end, after you reach your full retirement age of 66 or 67, you can request a “suspension of benefits.” During a suspension, you accrue delayed retirement credits, which means an increase in your monthly retirement benefit when you start collecting again. You can ask the SSA to reinstate your benefits at any time until you turn 70. If you don’t restart benefits by age 70, the agency will do it for you.

If you suspend benefits, any family members who receive benefits based on your earnings record will also be suspended, except for divorced spouses. Any benefits you receive on someone else’s record will also be suspended. Additionally, your Medicare Part B premiums cannot be deducted from your suspended benefits. Instead, the Centers for Medicare & Medicaid Services will bill you for those Part B premiums.

Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. Rick enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. His previous articles include Lucky StrikesRate Debate and For Goodness Sake. Follow Rick on Twitter @RConnor609.

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2 years ago

Excellent overview of complex issues, thanks!

2 years ago

Good discussion Richard! You might also point out that your colleague also has a third option: do nothing–except keep working, that is. The way the earnings test works, once you’ve “flunked” it, is that the total reduction in benefits is front-loaded into next year’s payout of benefits, with the end result being that your FRA benefit will be credited for these months with no payout as if you had not claimed at all. So, if your colleague “loses” all of his benefit due to the earnings test, it’s treated as if he had waited an extra year to claim his benefit. And if he loses, say half, then it’s as if he had waited an extra half-year to claim, and so on. When he ultimately does stop working, the benefit that is restored to him is not at the same level as he started at when he claimed early, but at a higher level with the extra credits he’s received by “delaying” with earned income.
Now, if others are claiming off of his benefit, such as a spouse or child or parent, it gets much more complicated–and a discussion with an expert on Social Security is very much in order.

Rod Simonson
Rod Simonson
2 years ago

If he earns enough to trigger the $1 for every $2 repayment, he is likely earning enough to replace one of his lower income years, raising his soc sec distribution base figure for the next year… and every year thereafter. Bear in mind, the reduction in payout for early draw is predicated on an actuarial table, and calculated so that the “odds” are the recipient will get the same payout over their lifetime whenever they begin to draw. Contrary to most bloggers’ opinions, there is hardly ever a disadvantage to collecting as early as possible. Do the math with someone you trust. The break even point is 10-15 years out, and if you can’t make that 7% per year back in compounded interest, then you were not going to be prepared for retirement at any age.

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