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Penalty — The Messiest Social Security Rule Ever
If someone would appoint me the “Master of the Social Security Universe,” or
give me some other appropriate title that would allow me to change any law or
regulation on Social Security’s books, I would immediately get rid of the
earnings penalty provisions of the law. These are the rules that limit the amount
of money a Social Security recipient under the age of 66 can earn if he or she
is working while collecting benefits.
These rules confuse almost every Social Security beneficiary. And worse yet,
they are a nightmare for the government to administer. Because of the messy rules,
millions of Social Security recipients are being either overpaid or underpaid
every year. And once you fall into the overpayment/underpayment trap, it can
be years before your benefits are straightened out.
And this has been going on for decades now. I remember trying to explain the
complex rules to perplexed beneficiaries back in my early years of working for
the Social Security Administration. At the time, my mother was getting Social
Security benefits and was working part time on the side. And she, too, was always
getting either too much or not enough in her Social Security checks. And I used
to tell folks this: “If I can’t keep my own mother’s Social
Security straight, how do you expect me to help you?”
Before I give an example of how messy these rules can be to administer, let me
give you an overview of the earnings penalty sections of the law.
The government calls these provisions the “retirement test.” And
that’s because it was supposed to be a test of someone’s retirement
status. Simply put, Social Security rules have always said that a person must
be retired to collect retirement benefits. (But please note the same rules also
apply to people who get Social Security dependents or survivors benefits — like
widows, for example.)
But from the beginning of the program, Congress decided that people should be
able to work and earn a little bit of money and still get benefits. In the very
earliest days of Social Security, the earnings threshold was set at $50 per month.
But over the years, the rules have been both liberalized, and in the process,
made much more complicated.
The earnings threshold changes every year, but today, the rules say this: If
you are under your full retirement age, you can get all your Social Security
benefits if you are working and keep your annual earnings under $15,120. If you
exceed that threshold, one dollar must be withheld from your Social Security
checks for each two dollars you make over the limit. That may sound simple enough.
But I am going to give an example of how that relatively simple-sounding law
leads to so much confusion and so many administrative headaches.
Let’s say Stan filed for Social Security benefits at age 62 and started
getting $1,700 per month. When he turned 63, he decided to return to work. He
was aware of the $15,120 limit and was determined to keep his income under that
amount so he would have no problems with his Social Security. But as time went
on, he ended up working more hours and even earned some overtime. He now estimated
he’d make $18,000 for the year. So he reported that to SSA and they sent
him a letter telling him that they would withhold $1,440 from one of his Social
Security checks. ($18,000 is $2,880 over the $15,120 threshold. One half of that,
or $1,440, must be withheld from his Social Security.)
But by the end of the year, Stan realized that the $18,000 estimate he gave to
Social Security officials was low. When he got his W-2 form at the beginning
of the following year, he learned that he actually made $19,000. That was $1,000
more than he had reported to SSA, meaning he owed them half of that, or another
So he took his W-2 form to his Social Security office. They set up their computers
to hold back that extra $500. But at the same time, they asked for an estimate
of his anticipated earnings for the current year. Stan told them he thought he
would make the same as last year: about $19,000. So in addition to recouping
the $500 overpayment for the prior year, they also set in motion the process
of withholding another $1,940 for his excess earnings for the current year. But
then if history repeated itself and Stan’s estimate of $19,000 in earnings
turned out to be too low, he would once again be overpaid in Social Security
Do you see where I am going with this? The process of paying some benefits and
withholding other benefits and recouping overpaid benefits just continues to
compound itself. As I said, it is totally confusing to Stan, and it is an absolute
nightmare for Social Security officials to administer.
And I haven’t even gotten into a special rule that applies to a person’s
first year of retirement; and another special rule that applies to the year a
person turns age 66.
One reason Congress doesn’t simply eliminate the earnings penalty is because
of the costs. Billions of extra dollars in Social Security benefits would have
to be paid each year to working beneficiaries. To prepare for the onslaught of
baby boomer retirees, Congress is looking for ways to trim benefits, not expand
I have written a fact sheet that explains the earnings penalty provisions of
the law in as simple a way as I know how. So if you are a Social Security beneficiary
who is under the age of 66 and working part time and think you may exceed the
earnings penalty thresholds, send an email to me at email@example.com ask for a free digital copy of “Working After Retirement and the Earnings
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