There are a lot of misunderstanding about the Social Security rules. Some of these rules are coming into play more than usual during the Covid-19 pandemic, so it’s important to know the rules. A misunderstanding can lead to poor decisions and lower lifetime benefits.
When someone is both working and receiving Social Security benefits, there is an earnings test that limits the benefits paid before full retirement age (FRA). Before FRA, $1 of benefits will be withheld for every $2 you earn over the annual limit of $18,240 in 2020. (The limit is indexed for inflation each year.) In the year a person applies for benefits, an income limit of $1,520 applies for each month after the benefits begin. Once a person reaches FRA, there is no earnings limit. Benefits won’t be reduced no matter how much the person earns.
FRA is based on the year you were born. Full retirement age is 66 for those born in 1943 through 1954. For those born in 1955, FRA is 66 and two months. Those born in 1956 have an FRA of 66 and four months.
Though the benefits are withheld, they aren’t permanently lost. Instead, after you reach FRA the Social Security Administration will recalculate the monthly benefits you are due. To the extent benefits were reduced in earlier years because of the earnings limit, future monthly retirement benefits will be increased. For each month benefits were reduced, the recalculation effectively takes away the reduction in benefits that was imposed for claiming benefits before FRA.
The point is that if you claim Social Security benefits now because you lost a job and need the income, the earninsg limit isn’t a good reason not to return to paid employment when you can. Though the benefits will be withheld to the extent you earn “too much” money, your future Social Security benefits will be increased. Over the long term, you won’t be penalized for working while receiving benefits. Of course, after FRA the earnings limit doesn’t apply so it isn’t a reason not to work if you can.
Let’s look at a different situation.
Suppose someone’s income declined because of job loss or a business downturn. This person is at least age 62 and hasn’t claimed Social Security benefits. He still plans to delay claiming benefits until at least FRA to maximize lifetime benefits.
In this situation, the benefits eventually paid are likely to be less than the estimates issued by Social Security. That’s because the estimates issued by Social Security assume the amount of income earned in the latest year will be your earnings for each year until benefits are claimed. If some of those future years have substantially lower earnings than your latest year or no earnings, the retirement benefits paid are likely to be lower than today’s estimates.
The extent of the reduction depends on the individual’s earnings record. Benefits are based on your highest 35 years of earnings. If you already have 35 years of high earnings, not earning income for a few years won’t affect the benefits by much, if at all. In many such cases, a few years with no income or lower income reduces lifetime benefits by less than $100 per month.
You can determine how a change in futures earnings affect your future benefits by opening a “my Social Security” account on the Social Security web site (www.socialsecurity.gov) and using the benefits estimator to give you a custom estimate.
When you’re considering a revision in your Social Security claiming strategy because of the pandemic, remember the key rule. For married couples it’s very important for the higher-earning spouse to delay receiving benefits as long as possible, preferably to age 70. That’s because after one spouse passes away, the surviving spouse will receive only the higher of the two benefits for which the spouses were eligible. If money is tight, it’s best for the lower-earning spouse to claim benefits early while the other spouse waits to claim benefits.