Ask Larry: Will I Be Repaid Social Security Benefits Withheld Due To The Earnings Test?

Today’s column addresses questions about benefits lost to the earnings test, continuing to work after filing, what happens to disability benefits at full retirement age (FRA), deciding not to continue working after filing and when to file for spousal benefits. Larry Kotlikoff is a Professor of Economics at Boston University and the founder and president of Economic Security Planning, Inc, a company that markets Maximize My Social Security and MaxiFi Planner.

See more Ask Larry answers here.

Ask Larry about Social Security here.

Will I Be Repaid Social Security Benefits Withheld Due To The Earnings Test?

Hi Larry, I’m 63 and am considering returning to full time employment and I was wondering about suspending Social Security benefits. What does it mean that $1 out of every $2 over the additional income threshold will be withheld from my benefits. Does the money come back to me or is it gone for good? Thanks, Harold

Hi Harold, Any amount of benefits withheld due to the earnings test are simply forfeited. Social Security recipients don’t have an individual account that the benefits could be returned to. All Social Security retirement benefits are paid from the same trust fund, and any benefits withheld due to the earnings test simply remain in the trust fund.

If you forfeit benefits due to the earnings test, those benefits are never directly returned to you. However, after you reach full retirement age (FRA), Social Security automatically adjusts your benefit rate to compensate for any months that your benefits were not paid due to the earnings test.

For example, say Dana’s FRA is 66 but she files for her benefits early at 63. Dana’s benefits rate at FRA would be $1,000 but is reduced by 20% to $800 in return for starting to draw three years sooner. However, if Dana is only paid for 18 of the 36 months prior to FRA due to her earnings, her benefit rate would be adjusted at her FRA to remove 10% of the 20% reduction initially applied to her benefit rate, raising her monthly rate to $900. So if Dana in my example lives long enough, the $100 higher monthly benefit rate could potentially allow her to recover more than what she lost to the earnings test. Best, Larry

How Does It Work When You File For Benefits And Keep Working?

Hi Larry, I was planning to work until I’m 70. However, I have some friends about the same age who are continuing to work but have filed already for Social Security. How does that work? Should I file now? I’m a little confused. Thanks, Tom

Hi Tom, You can file to start drawing Social Security retirement benefits any time from 62 to 70, and your benefit rate would vary accordingly. The earlier you file, the lower your rate. There is an earnings test that can prevent people from drawing benefits prior to full retirement age (FRA), but once you reach FRA you can choose to start drawing your benefits regardless of how much you work and earn.

Your best strategy for claiming your benefits depends on a number of different factors, so you may want to try one of my company’s two tools — Maximize My Social Security or MaxiFi Planner — to explore and compare her options so that she can choose the best possible strategy for claiming her benefits. Social Security calculators provided by other companies or non-profits may provide proper suggestions if they were built with extreme care. Best, Larry

Is It True That My Husband’s Disability Benefits Would Convert To Regular Social Security?

Hi Larry, My husband begins collecting private disability insurance benefits this month at 64 from two work policies. Our plan is to defer our respective Social Security retirement benefits until 70, unless we should wait till 70.5 as we heard, to maximize monthly benefits. I plan to work until that point. However, one of the disability insurers is requiring my husband to apply for Social Security disability now, which we understand will be paid to the insurer during the four years it is paying benefits. Is it true that this will effectively convert Social Security income benefits at full retirement age and require him to forever receive the lower Social Security benefit, thus thwarting our plan to wait till 70 to collect? Also, is he required to pursue this or is there a way to avoid this unintended consequence of receiving private disability payments? Thanks, Sharon

Hi Sharon, If your husband is approved for Social Security disability (SSDI) benefits, his SSDI benefits will convert to regular Social Security retirement benefits when he reaches his full retirement age (FRA). However, when he does reach FRA he can voluntarily suspend his benefits until 70, which would result in him being paid the same benefit rate at age 70 as he would have received if he had simply waited until age 70 to file. By the way, voluntary suspension requests must be submitted in advance, so to get the maximum age 70 rate your husband will need to contact Social Security to request suspension no later than the month prior to the month he reaches FRA. Whether or not your husband could continue receiving his private disability insurance while his Social Security benefits are suspended would depend on the terms of his policy.

Most private and employer disability insurance policies have conditions that require claimants to also file for SSDI benefits. In other words, they are intended to work as a supplement to the person’s SSDI. If filing for SSDI is a condition in your husband’s policy, then he’ll likely either have to file for SSDI or not claim the private disability payments. Best, Larry

How Will My Full And Maximum Benefit Rates Be Affected If I Don’t Go Back To Work?

Hi Larry, I will be 64 this month and I stopped working in late last year. My SSA statement estimates my full retirement age benefit as $2,841 and my benefit at 70 as $3,766 If I do not take another payroll based job, how will my benefit be affected? Thanks, Christie

Hi Christie, I would need a full list of your lifetime yearly earnings to give you an exact answer. Your Social Security retirement benefit rate is based on an average of your highest 35 years of wage-indexed earnings. The estimated benefit rates on your Social Security statement are likely based in part on an assumed level of future earnings, which should be shown on the statement. If those earnings don’t materialize, Social Security will use your highest 35 years of earnings from your past earnings history. But how much of a drop off that would mean in your benefit rate depends on the difference between your total earnings in your actual 35 highest earnings years and the total used by Social Security for their estimate. Best, Larry

Will This Work Out?

Hi Larry, I’m 68 and a half and called Social Security this month to start my benefits. My wife turned and applied online for spousal only at the same time. Will this work out? When they review my wife’s online app, will it coordinate with them knowing I am starting benefits to allow her spousal benefits? Thanks, Doug

Hi Doug, If you’ve previously filed for and suspended your benefits, then it should work out okay. However, if you just filed for your benefits today then I’m not sure if Social Security will coordinate things correctly. A person can’t file for spousal benefits unless their spouse has filed for Social Security retirement or disability benefits, so Social Security would normally disallow a claim for spousal benefits filed by a spouse whose spouse hasn’t yet filed. But if your wife’s claim was still pending when your claim was filed then Social Security should eventually be able to sort things out. Best Larry

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