Smart Money
The “Security” In Social Security Is an Oxymoron
How to Keep What Belongs to You
What do you know about Social Security? Most of us probably know that it is something that sweet little old people receive in their retirement, but can’t live on entirely. When I started receiving benefits at age 62, that is all I knew. In the process of getting back on my feet after a double dose of life’s challenges, I took early social security. For me, social security was going to be a bridge while I worked on something greater.
By definition, “early social security” is taking it before reaching your full retirement age of 66–67. I was working part-time, which was all I could find at the time and I needed the extra help. What could possibly be the harm in taking early social security while working part-time? Well, the answer to that question is “plenty.”
What the Social Security Administration doesn’t emphasize much during the application process is that they have an earnings cap. They take this very seriously and will penalize you in a heartbeat. When I applied, they asked me if I was planning to work, and if I was planning on making more than $17,000 a year. What they didn’t tell me is what would happen if I did. In need of the extra money, it didn’t even occur to me to ask. I was working a part-time hourly job and didn’t expect my earnings to be much more than that. At the time it all seemed rather harmless, but making even just a little more than their cap caused me financial derailments, hardships, and lots of heartburn.
The trouble started in my first year when I exceeded their earnings cap by a couple of grand. First of all, if you make more than their earnings cap, you’ll have to pay a certain amount of taxes on the overage. You’ve already paid taxes on the gross the first time around, so you’re getting taxed twice on the overage. Luckily for me, the small amount of tax I had to pay was small and not a financial concern.
Secondly, if you exceed their cap, they will randomly adjust your benefits with little to no notice. They don’t adjust your monthly benefit amount, they just take your benefits away altogether for a month or two, or for however long they determine. What if suddenly, your employer says to you that they are not paying you for the next two months? It would put most of us in a world of hurt. When the Social Security Administration does this, they are snatching your money and it’s perilous to your bottom line. Let me illustrate by telling you my story.
It is October 2020 and within the first three quarters of the year, I have been adjusted 3 times. They took all but $181 dollars of my January 2020 payment because “I made too much money in 2018.” To their credit, they sent me a letter in November 2019 saying that this was going to happen in January, which was the most amount notice they ever gave me. In my mind, I expected to be adjusted again at the beginning of 2021 and I planned to be financially prepared in the new year when adjustment time came around again. One settles up with the IRS once a year and I assumed it would be the same with the Social Security Administration. Boy, was I wrong.
Fast-forward to the end of July 2020 where I received another letter saying I owed them $2,048 for overpayment in 2019 and that this payment was due to them in 6 weeks, on October 14, 2020. Suffice it to say if I had an extra two grand sitting around, I probably wouldn’t need Social Security. After constant calling, being put on hold, and then leaving messages for agents who would return my call from their homes during the COVID era, I was able to set up a repayment plan whereby they would take an amount out of my benefit check each month until it was paid. So, I am now repaying the Social Security Administration for what was really my money, to begin with.
In that same multi-page, poorly-written and confusing letter, buried beneath a mound of governmental mumbo-jumbo, was another declaration that they were seizing my benefit money in advance for what “they think” I’ll be making in 2020. Believe me when I say that these letters are not only confusing, but the statements within their letters contradict other statements. The only way to make sense of it is through human clarification. After making many calls, a human was able to clarify what the letter was saying. This process took me two weeks and several humans.
With just 10–12 days notice tops, they took both my August and September 2020 payments. You may be thinking, “That isn’t right.” It isn’t right, but they also do not care. You can appeal, but with only two weeks before they seize your payment, that option is useless. The Social Security Administration will do what it is going to do regardless.
For those of you playing along at home, let’s tabulate the damages to my bottom line during the first three quarters of 2020:
- Nearly all my January check was taken, let’s round that to $1,500.
- August and September’s payments were seized, let’s add $3,000.
- The demand for repayment of overage in 2019, please add $2,000.
All-in-all, to date in 2020, the Social Security Administration has penalized me to the tune of $6,500. For someone not making much more than $36,000 a year, $6,500 is a boatload of money.
I can’t emphasize enough that these adjustments were at random, so there is no way to plan for them. That said, they couldn’t give me a date of when they planned on doing this to me again. Logically speaking, they’ve already penalized me for 2020, so I should be good for a while in 2021, but with the methodology they use, you never really know. This earnings cap and random seizure of benefits is the biggest hidden gotcha of the entire system, hence making the “security” in social security an oxymoron.
So in closing, if you plan to work and take Social Security before the full retirement age of 66–67, here is some food for thought:
- The average person earns in the neighborhood of $1,500 a month in social security benefits, which comes out to $18,000 a year.
- The current earnings cap (it goes up a smidge each year) is $18,420.
- Ask yourself if you can live on $36,000 or $37,000 a year and if so, can you live on that amount for the next 5 years until you reach full retirement age?
If the answer to question #3 is no, you may want to make other plans. If you’ve had a steady career for 40 years and have 401Ks, IRAs and pensions set aside or have a nice portfolio of investments, then this isn’t a concern for you. The Social Security Administration doesn’t count this as income. If you receive wages and are paid via W2 or 1099, the social security people will audit your tax returns and adjust you… at random intervals. You can’t plan for this. If you have no financial wiggle room and don’t have a cushion, this can hurt your wallet greatly.
I strongly encourage you to find out more by visiting their website: www.ssa.gov and by consulting with your financial advisor. If I had known then what I know now, I probably would have gone about this differently. Plan ahead and know their rules, so you can keep what truly belongs to you.
