Don't Play by the Rules
Well, let's see if I get in trouble again! Today's question comes from a retiree who plans to return to work, he will make about $20K and is worried about how his earnings might jeopardize his eligibility for his Social Security benefits. It's a question I'm often asked. And my usual answer doesn't exactly follow the Social Security Administration playbook. In the past, I've gotten into trouble with some of my former colleagues at SSA who took me to task for encouraging people to bend the rules. But I still think I'm handing out good advice. Before I get to the question and my apparently controversial answer, let me first explain the rules. Once you are 66 years old, you can make as much money as you want and get all of your Social Security checks. But if you are on Social Security and you are under that magic age and you return to work, then the law says that for every two dollars you earn over $16,920, one dollar must be withheld from your Social Security benefits. It sounds simple enough. But the reason it gets complicated has to do with the mechanics of how the law is administered. Let's follow an example. Jack is 64 and getting Social Security. He starts working and dutifully reports his earnings to Social Security (after waiting on hold for 45 minutes). He is told that based on his reported earnings, he isn't due any benefits for the next five months. After a couple of months' processing delay, SSA finally stops his checks. And being a good citizen, Jack had returned the two checks he received before his benefits were stopped. But then a month later, Jack got an overpayment letter from SSA telling him he owed an amount equal to the two benefits checks he already returned. It took several more months to straighten that out. Then later in the year, Jack learned he was getting a raise and was asked to work more hours. So now he was expecting to make several thousand dollars more than the first estimate he gave SSA. Once again, he reported this. And that report led to another overpayment letter advising him of benefits he was now not due based on his new estimate. Then, at the beginning of the next year, when he got his W-2, it turned out that he didn't make quite as much as he had previously reported to SSA. So now, the agency owed Jack some of that money they had asked him to repay last year. But at the same time, Jack reported his anticipated earnings for the new year, and this led to another round of benefit reductions and overpayment letters. And on and on it goes! And this is not an exaggerated example. It is fairly typical of what happens to folks when they get wrapped up in the administrative nightmare of dealing with Social Security's earnings penalty rules. So now let's look at today's question and how I suggest that slightly bending those rules can save you a lot of heartache. So, you could play by the rules, like Jack did in the example I cited above. But look where that got him! In other words, you could contact SSA and report your anticipated earnings. They will eventually stop your benefits. Then you could just cross your fingers that you keep your job, earn exactly as much money as you initially reported, and don't get slapped with any overpayment letters. Or you could do what I've been advising people in your situation to do for years. And that is to do nothing. Just let your Social Security checks continue to flow into your bank account -- remembering all along that you aren't due all of those benefits and will eventually have to pay some of them back. At some point down the road (it might be later this year, or it may even be early next year), SSA will learn that you have been working -- either because of earnings reports from your employer or through a computer data exchange with IRS. Once they learn you had been working and the precise amount of your earnings, they will send you an overpayment letter. But you will be expecting it and, assuming you didn't lose all the proceeds of your Social Security checks in a wild gambling spree in Las Vegas, you will have the money sitting in your bank account ready to pay them back. (And by the way, they don't charge interest.) There are two advantages to doing things this way. One: You can pocket what little interest you might have earned on those benefit payments before they were stopped. And two: You avoid all the back-and-forth hassle with SSA -- the calling and waiting on hold and starting and stopping of Social Security checks that Jack experienced. What I am suggesting you do isn't exactly kosher, but it's not illegal. You'd simply be bending the rules a bit. As long as SSA eventually gets its money back, they'll be satisfied. And as a side note: Here is a message to any of my readers under age 66 who are getting Social Security checks and decide to return to work, thus forcing a suspension of those checks. Once you reach age 66, you will get credit for those months in which you did not receive a benefit -- in the form of an adjustment to your initial benefit reduction.