What’s the cost of returning to work after taking Social Security early?

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Benefit reductions from the earnings test can wreak havoc on your budget, says Larry Kotlikoff, because they're front-loaded. Photo by of Tetra Images/Flickr.

Benefit reductions from the earnings test can wreak havoc on your budget, says Larry Kotlikoff, because they’re front-loaded. Photo by of Tetra Images/Flickr.

Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out maximizemysocialsecurity.com/ask-larry.


Larry Kotlikoff’s Social Security original 34 “secrets”, his additional secrets, his Social Security “mistakes” and his Social Security gotchas have prompted so many of you to write in that we now feature “Ask Larry” every Monday. Find a complete list of his columns here. We are determined to continue it until the queries stop or we run through the particular problems of all 78 million Baby Boomers, whichever comes first. Let us know your Social Security questions. Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version.


Oak Creek, Wis.: I would like to retire at 60. I am 59-and-a-half this year. My husband and I were married for four years. He passed away when he was 57 and never applied for Social Security. I receive a pension from his employer for $989 a month until I die. His benefits, as of now, would be about $1,440 a month, per Social Security. Mine are about $800 a month, according to Social Security.

I hate the job that I had to take after I was fired from my job of 14 years. Can I retire at 60 in the first place? And when Social Security tells me his benefits would be $1440, is that after the early retirement deduction or before? Also, how much can I earn if I have to go back to work to make ends meet?

Larry Kotlikoff: Very sorry to hear about your husband’s passing. It may be best for you to take a reduced retirement benefit at age 62, and then at full retirement age, take your widows benefit.

Or it may be best to take your reduced widows benefit starting at 60 and your own retirement benefit at 70. I can’t tell from the numbers you include whether these are reduced or full retirement benefit amounts, called Primary Insurance Amounts. Very sophisticated software can tell you what strategy is best.

Any calculation must fully incorporate the earnings test so you can see the impact that working more and earning at different levels will have on your lifetime benefits. You are compensated for benefits lost due to the earnings test with an upward adjustment of your benefits starting at full retirement age. The problem is that the adjustment (called the adjustment of the reduction factor) is made only with respect to the benefit you were receiving at the time you were hit by the earnings test. If you flip to another benefit, the adjustment won’t carry over — meaning the earnings test will really cost you money.

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For someone whose full retirement age (FRA) is 66, their Social Security benefit is now reduced by $1 for every $2 in earnings (including earnings in non-covered employment) that exceed $15,480 while they were aged 62 to 65. During the year they turn 66, their benefit is reduced by $1 for every $3 in earnings that exceed $41,400, and only earnings in the months before reaching FRA are counted. These are 2014 trigger levels; the levels change every year to reflect national wage trends.

Benefit reductions are not pro-rated during the year; they’re front-loaded. This can wreak havoc with your budget. For example, if outside earnings reduce someone’s annual benefits from $18,000 to an annual benefit of $12,000, her $1,500 monthly payment would not be reduced to $1,000 for an entire year. Instead, she would get zero Social Security payments for four months and then the $1,500 payment for eight months.


Mary — Milwaukee, Wis.: These days, with millennials hurting, there is talk of generational “warfare.” Greedy geezers versus unemployed millennials, with the lurking specter of poorly paid millennials footing the bill for the “fat cat” boomers’ Social Security payments. I am wondering what happens to the Social Security benefits people receive. Does most of that money recirculate into the economy? Or do the greedy geezers hoard it (perhaps to pass it to the next generation)? One would think that the Social Security payments to seniors are needed to meet current needs and that they are spent and recirculated. If this is true, does this have a salubrious effect on the economy? Does this recirculation benefit millennials and the economy in general?

Larry Kotlikoff: No one can eat green pieces of paper. So the focus on recirculating money is misplaced. The real issue is that the economy produces output each year – call it corn, which can be eaten or planted. The more that’s planted, the more productive young workers will be. Think of young workers being hired to raise crops. If no corn seed has been planted, there is no weeding, watering, harvesting, etc. to do and, therefore, no need for, nor payment, to the young.

The U.S. has spent six decades taking ever larger shares of the corn workers earn when young and giving it to the old in the form of benefits. The old have consumed this. In so doing, they have lowered national saving and investment. The young have been told they’d get their chance to steal from their children through the take-as-you-go policy we’ve been running. In other words, they too have been promised very large benefits in old age. As a result, they have also consumed a lot and saved very little.

But this Ponzi scheme is falling apart, as all such schemes do. As a result, today’s young kids are facing astronomical future tax hikes and benefit cuts, and not just with respect to Social Security. And thanks to our take-and-spend-as-you-go generational policy, the nation’s saving rate is now close to zero and our domestic investment rate isn’t much larger. This has left today’s young with less capital (seed corn) with which to produce and, as a result, they are earning far less in the market place than had each age group collectively paid for the Social Security, Medicare and Medicaid it received.

Don’t get me wrong. I’m a huge supporter of Social insurance (see The Purple Plans for proof). But I’m also outraged, morally and as an economist, by generational theft.


Heber, Utah: I am 61 and my wife is 58, and we have a 27-year-old son who is disabled. Right now, he gets Supplemental Security Income. Is there any way of taking my Social Security that would be advantageous to our son?

Larry Kotlikoff: When you are 62, you can file for your reduced retirement benefit and permit your son to collect a child benefit based on your work record. That benefit will equal half of your full (not reduced) retirement benefit. (If you pass away, his child survivor benefit will be 75 percent of your full retirement benefit, by the way.)

When you reach full retirement age, you can suspend your retirement benefit and start it up again at age 70 at a roughly 32 percent larger level (above and beyond the adjustment for inflation). This start-stop-start strategy may or may not maximize your lifetime benefits. There is very sophisticated and inexpensive software that examines start-stop-start strategies to see if they are optimal.

Please be advised, though, that any Social Security benefits your son receives will reduce his SSI benefits roughly dollar for dollar. If his benefit amount from your account is high enough, the SSI may stop altogether.


Judith – Celebration, Fla.: I am 63 and get my own Social Security every month. I am still married but separated and planning to divorce soon. My first marriage ended in divorce after 20 years. When I divorce my second husband, am I able to collect Social Security from my first husband, even though I already started to collect from my own Social Security?

Larry Kotlikoff: Yes, Judith, you can collect on your first husband if he’s 62 or older. And you can collect a widows benefit based on either husband when they die, assuming that your second marriage lasted at least 10 years.

But because you filed for your own retirement benefit, you entered “excess benefit hell.” This means, very roughly speaking, that whenever you file for another benefit, you’ll just get the larger of your own retirement benefit and your auxiliary benefit (i.e., your divorced spousal or divorced widow benefit). Even if you suspend your retirement benefit at full retirement age, you will, between full retirement age and age 70 (when your retirement benefit will automatically recommence), receive only the difference, if positive, between your auxiliary benefit and your reduced retirement benefit, but augmented to include any delayed retirement credits you accrue.

If you are still within one year of collecting you retirement benefit, you can withdraw it by filing the correct form. But doing so will require repaying all the benefits you received so far. However, if you do this, at full retirement age (and not a day before), you can file just for your divorced spousal benefit and collect just that (instead of the difference, if positive, between your divorced spousal benefit and your own retirement benefit), while letting your own retirement benefit grow through age 70.


Judy – Homosassa, Florida: I currently receive benefits under the civil service program with the Federal Government and don’t have enough paid into Social Security. My husband retired on disability and started on regular Social Security when he turned 66. I will be 65 in a few months, and the Social Security Administration told me I could get Medicare under my husband. Will I have to sign up for Social Security to get Medicare and will it affect my husband’s benefits?

Larry Kotlikoff: Your signing up for Medicare Part A and, if you want, Part B, and, if you want, Part D, when you reach 65 won’t affect your husband’s Social Security benefits or your own.

So, no, you don’t need to sign up to take your Social Security spousal benefit when you start collecting Medicare. You should probably wait until full retirement age, in your case 66, to file for your spousal benefit. If your husband passes away, you’ll be able to collect a widows benefit, which will be significantly higher than your spousal benefit.

However, Social Security’s Government Pension Offset provision may substantially reduce or even eliminate the spousal and survivor benefits you would otherwise receive.

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