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Payback When You’ve Earned Too Much

earnings test

photo credit: diedoe

In an earlier post, we talked about the Social Security Earnings Test, which is applied when you are receiving your benefit early (before Full Retirement Age) and you earn over certain limits. Briefly, in the years before the year you reach FRA, when you earn salary in excess of the limit, the Social Security Administration will withhold your benefit in an amount equal to $1 for every $2 over the specified limit. In the year that you will reach FRA, the reduction is equal to $1 for every $3 over the limit. (See the original article at this link for details on how this works.)

While a portion of your benefit is, in fact, withheld for the earnings, there is an eventual “payback”… when you reach FRA, your reduced benefit is recalculated, eliminating those months when your benefit was withheld. The recalculation is done as if you delayed filing for the number of months that your benefit was being withheld.

There’s a misconception that you actually receive back the dollars that were withheld due to your over-earning. That’s not how it works – you actually get credit back for the months when your benefit was withheld. This is much the same as how the “do-over” option works, except that you’re not paying it back to the SSA, they’re just never giving it to you.

So, for example, let’s say you took your benefit at age 62 (reducing the benefit to 75% of your PIA) and you had earnings that caused the SSA to withhold four months’ worth of benefit each year for the four years between age 62 and 66. When you reach FRA you would actually improve your benefit by 7.22% – because your reduction would be adjusted to 82.22% of your PIA.

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