Dear Rusty: How much would be withheld from my Social Security benefits? I’m 62 and can claim about $1900 a month now. I’m still working and making about $75,000 a year. How much of my benefits will I receive? What would be held back and when could I get it back? And would there be a penalty? Signed: Eligible but functional
Dear Eligible: In the scenario you describe, you will not be eligible for Social Security retirement benefits at this time because your income is too high. Here is how it is determined:
• At age 62, you are subject to the Social Security “earnings test” which limits the amount you can earn while receiving early benefits. The earnings limit applies until you reach full retirement age (FRA), which for you is 67.
• Your penalty for exceeding the win limit would now be $1 for every $2 the limit is exceeded. With your current salary of $75,000 a year, you will be $55,440 over the 2022 annual earnings limit of $19,560, which means you will owe $27,720 to Social Security. Since your benefit amount at age 62 is approximately $1,900 per month ($22,800/year), your annual SS benefit would be insufficient to offset the over-the-earnings penalty. You would therefore not be entitled to a social security benefit based on your current income. . You will be eligible for SS again when your earnings are significantly lower or when you reach full retirement age, whichever comes first.
The Social Security earnings test affects everyone who works and earns when collecting benefits before reaching full retirement age. Each year, Social Security sets a limit on the amount that can be earned before benefits are affected (the 2022 limit is $19,560; it increases slightly each year). Those who exceed the limit pay a “penalty” of $1 for every $2 the limit is exceeded, which must be paid to SS either in a lump sum or by withholding benefits for enough months for SS to recoup what is of. If your Social Security benefit is not enough to offset the penalty for exceeding the earnings limit, no benefit will be paid.
Those who collect early benefits and only earn a little more than the annual earnings ceiling can collect benefits every year because their penalty is low enough. For example, someone earning $25,000 per year would exceed the 2022 earnings limit by $5,440 and therefore incur a penalty of $2,720. That would probably mean about 2 months of withheld benefits, allowing them to get benefits for the remaining 10 months of the year. Social Security will withhold benefits for enough months to recover whatever the recipient owes for going over the limit.
The rules surrounding the Social Security earnings test are somewhat complex. For example, there is a “first-year rule” that exempts wages earned before claiming SS from counting toward the earnings limit. When a person first applies for Social Security mid-year, they are instead subject to a monthly limit ($1,630 for 2022) for the remaining months of the calendar year. If the monthly limit is exceeded, no benefit is payable for that month. The earnings limit no longer applies when the full retirement age is reached, but is still in effect in the months of that year before reaching the FRA. The income limit during these months is much higher and the “penalty” for exceeding it is less.
Social Security prefers that those who work and collect early benefits contact them in advance to withhold benefits for as long as necessary to offset the expected penalty. This will prevent an overpayment notice from being issued the following year when your income amount is received from the IRS.
After full retirement age, Social Security will adjust the beneficiary’s payment to account for the months of benefit withholding and increase the monthly amount accordingly. This will result in some, if not all, of the withheld benefits clawed back over time (depending on longevity).
This article is intended for informational purposes only and does not represent legal or financial advice. It presents the opinions and interpretations of AMAC Foundation staff, trained and accredited by the National Social Security Association (NSSA). The NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other government entity. To submit a question, visit our website (amacfoundation.org/programs/