Ask Larry: Does Social Security Really Repay Benefits Withheld Due To The Earnings Test?

Today’s column addresses questions about whether or not benefits lost to Social Security’s earnings test are actually repaid at full retirement age, suspending retirement benefits and filing for spousal benefits after taking early retirement benefits. Larry Kotlikoff is a Professor of Economics at Boston University and the founder and president of Economic Security Planning, Inc, which markets Maximize My Social Security and MaxiFi Planner.

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Have Social Security questions of your own you’d like answered? Ask Larry about Social Security here.

Does Social Security Really Repay Benefits Withheld Due To The Earnings Test?

Hi Larry, I’ve had thousands of dollars withheld from my benefit checks in the last three years because of my work. I’ve read online and have also heard from coworkers that after you reach full retirement age, Social Security gives this money back to the person it was withheld from.

But I’ve also read and heard that this is not true. Is it really true or not? If it is true, can you tell me how they calculate what they’d pay back? Thanks, Mathew

Hi Mathew, Amounts withheld from a person’s benefits as a result of Social Security’s earnings test are not returned to the person when they reach full retirement age (FRA), at least in a direct manner.

What happens instead is that when the person reaches FRA, their Social Security retirement benefit rate, which would have been reduced for filing early, can be adjusted to compensate them for the fact that they weren’t paid some of their benefits prior to FRA. That could permit the person to recoup some, all, or more than all of the benefits they lost to the earnings test in the form of a higher monthly benefit rate over time.

For example, say that Jane files for reduced Social Security retirement benefits three years prior to FRA, so her benefit rate is reduced for age by 20% as a result. Let’s say Jane’s FRA rate would have been $1,000, but that amount is reduced to $800 in return for starting her benefits three years early.

Then let’s assume that because of Jane’s earnings Social Security ends up withholding her benefits for half of that three year period.

In that case, effective the month that Jane reaches FRA, her benefit rate would be adjusted to $900 to compensate her for the fact that she was only paid for half of the three year period that she was expected to collect benefits prior to FRA. In other words, instead of having her benefit rate reduced by 20%, starting with FRA Jane’s benefit rate would only be reduced by 10%.

Doing the math in the above example, we find that $14,400 (i.e. $800 x 18 months) of Jane’s benefits were withheld due to the earnings test. But because of that withholding, her benefit rate is increased by $100 when she reaches FRA.

So if Jane lives for at least 12 years after reaching FRA, she’ll have recouped all of the benefits she lost to the earnings test in the form of her higher monthly benefit rate (i.e. $14,400 / $100 = 144 months, or 12 years).

My company’s software — Maximize My Social Security or MaxiFi Planner — fully accounts for both the earnings test as well as the adjustment of the reduction factor at FRA so you might want to consider running it to see how this would play out in your case and to explore your options for maximizing your benefits. Social Security calculators provided by other companies or non-profits may provide proper suggestions if they were built with extreme care. Best, Larry

Can My Wife Suspend Her Social Security Retirement Benefits And Then Restart Them At 70?

Hi Larry, My wife turned 64 last September. If she files now for early retirement benefits, can she then suspend them at her FRA and let them grow until she turns 70 before starting them again? And I was born in 1953, so can I file for spousal benefit before taking my retirement benefits once I turn 70? Thanks, Pat

Hi Pat, Yes, your wife could voluntarily suspend her benefits anytime between her full retirement age (FRA) and 70. You wouldn’t be able to collect spousal benefits for any month(s) that your wife’s benefits are suspended, but that won’t be an issue if she doesn’t suspend her benefits until you switch to drawing your retirement benefits.

Just to be clear though, your wife wouldn’t be able to collect spousal benefits while her own benefits are suspended. Best, Larry

Can My Spouse Now Claim The Difference Between Her Benefits And Half Of My Benefits?

Hi Larry, My spouse and I were both born in 1948. She started her Social Security benefits at 62 after she retired. I am over seventy and started taking my retirement benefits at 70, although I am still working part time.

I took your advice and filed for my spousal benefit when I turned 66, which was my full retirement age but did not start my retirement benefits until 70. Can my spouse now now claim the difference between her benefits and 1/2 of my benefits, which is several hundred dollars a month? Thanks, Jerry

Hi Jerry, Your wife could apply for spousal benefits, but she’ll only be eligible if 50% of your primary insurance amount (PIA) is more than her own PIA. A person’s PIA is equal to their Social Security retirement benefit rate if they start drawing their benefits at full retirement age (FRA).

Furthermore, since your wife started drawing her benefits early, the resulting reduction for age applied to her benefit rate would continue even if she’s eligible for additional spousal benefits.

Your wife can’t switch from drawing her own benefits to drawing just spousal benefits instead. Once you file for your own Social Security retirement benefits, that becomes your primary benefit for life. If you later become eligible for a higher benefit rate on someone else’s account, you continue to be paid your own benefit plus a partial benefit from the other account. Best, Larry