How to work and collect Social Security in 2010
By Neil Downing

Planning to work while you collect Social Security benefits? If your earnings exceed a certain threshold, and you’re of a certain age, you’ll have to forfeit some of your benefits.

It’s the law. And for 2010, there’s a twist: That threshold will not increase. It’ll be the same as it was in 2009. As a result, some people will be even more careful about how much they earn. “It does make a difference” for certain beneficiaries, said Anthony Webb, associate director of research at Boston College’s Center for Retirement Research. “There’s a lot of academic research” which shows that “individuals do restrict their hours and their labor supply” in response to the limit, he said.

The federal law that created Social Security in 1935 included what the experts call a “retirement earnings test.” In essence, it said that you couldn’t collect Social Security retirement benefits and work at the same time. Over the years the law was changed, allowing beneficiaries – of Social Security retirement or survivor benefits – to earn a limited amount from work while still collecting. Automatic annual increases began in 1975, and the threshold has been rising ever since, like clockwork.

A federal law in 1972 required the threshold to be adjusted each year based on increases in the national average wage index. The automatic annual increases officially got underway in 1975, when the limit was $2,520. Until now. The threshold has stopped at $14,160 for 2010, the same as 2009’s level. It’s because there’s no Social Security cost-of-living adjustment (COLA) for 2010. Normally, the threshold rises with increases in the national average wage index. But a provision in federal law prohibits a hike in the threshold if there’s no COLA, said Kurt Czarnowski, regional communications director for the Social Security Administration.

So if you’re drawing Social Security retirement benefits early – before you’ve reached full retirement age – and you keep working, this could affect you.

To understand how the rules apply, you first must know your full retirement age for Social Security purposes. In olden days it was easy: age 65. But for everybody born in 1938 or later, full retirement age (sometimes called “normal retirement age”) is a bit higher, depending on the year of birth. For instance, if you were born Jan. 2, 1943, through Jan. 1, 1955, your full retirement age is 66.

Here’s why this is important:

• Early Retirement: If you start drawing Social Security benefits before the calendar year in which you reach your full retirement age for Social Security purposes, and you continue to work, you can only earn so much from work – $14,160 for 2010. For every $2 you earn above that limit, you’ll forfeit $1 in Social Security benefits. If you earn $16,160 in 2010, for instance, you’ll be $2,000 over the limit, so you’ll have to give back $1,000 in benefits. Most people start drawing Social Security retirement benefits before they reach full retirement age, so the rule affects a lot of people. Of the 31.5 million people collecting Social Security retirement benefits, about 23 million – or 73% – chose to start collecting before full retirement age, according to Social Security Administration figures for 2007, the latest period for which figures are available. (About 71% of men and about 76% of women started drawing early.)
• Full Retirement Age: A separate – and more lenient – limit applies for the calendar year in which you reach full retirement age. For 2010, it’s $37,680 (the same as it was for 2009). For every $3 you earn above the limit, you’ll forfeit $1 in benefits. But this limit applies only to amounts you earn before the month in which you reach full retirement age. (The per month earnings limit is $3,140, the same as it was for 2009.)
• Afterward: Beginning with the month in which you reach full retirement age, there is no earnings limit. So no matter how much you earn, you won’t forfeit benefits. It’s the result of legislation approved by Congress and signed into law by then-President Bill Clinton in April 2000 (the “Senior Citizens’ Freedom to Work Act of 2000,” Public Law 106-182). But don’t look for the break to be extended to those who work and collect benefits before reaching full retirement age, said Lita Epstein, author of “The Complete Idiot’s Guide to Social Security and Medicare.” “The government really intended [Social Security] to be for retirement,” she said. The limit is in place “to discourage early retirement,” she said. If everyone were to start drawing benefits early, it would strain an already stressed system, she said.

At one time, Social Security beneficiaries had to file an annual report of earnings with the Social Security Administration. But the agency in 1998 eliminated the requirement. Since then, the agency has relied instead on information filed about your earnings with the Internal Revenue Service – including Form W-2 wage statements for employees, and federal income tax returns for the self-employed. You can let the Social Security Administration know, in advance, what you expect to earn the following year, or notify the agency at year-end that you’ve exceeded the threshold for that year. Either way, the agency can promptly begin reducing your benefits accordingly, and you can plan ahead, Czarnowski said. Otherwise, you can simply wait until the agency checks IRS data about you for the previous year, then puts the benefit reduction in place. The bottom line is, if you don’t fess up, the government will eventually catch up.

So what counts as work for purposes of the limit? It’s whatever you earn as an employee. “Earnings” means your overall wages (gross wages) including bonuses, commissions and vacation pay – before deductions for income tax, Social Security tax, health insurance, union dues and the like. You must also count your net earnings from self-employment. (Technically, the agency uses this formula: Your gross wages for services rendered during the taxable year, plus all your net earnings from self-employment for that year, minus any net loss from self-employment for that year, according to the Social Security Program Operations Manual.)

But don’t count “unearned” income toward the limit, such as income from the following sources:

• Pensions
• 401(k) or other such retirement-savings plans.
• Investments (such as dividends or capital gains).
• Interest (from savings accounts, for example).
• Money or other assets you inherit.
• Annuities.
• Distributions from traditional or Roth IRAs.
• Unemployment insurance benefits.

Yes, you may have to forfeit some benefits. Indeed, about 64,000 retired workers – including about 37,000 men and 27,000 women – had to forfeit a portion of their benefits in 2007 because their earnings exceeded the threshold, Social Security tables show.

But forfeiting isn’t such a bad thing, Epstein said. She offered this example: Suppose that, for 2010, you collect $12,000 in Social Security benefits. You’re also trying to decide whether to work, which could generate $24,000 in gross earnings for the year. Your earnings from work would put you $9,840 over the limit of $14,160. Thus, you’d have to forfeit $4,920 in benefits. On a monthly basis in this example, you’d forfeit about $410 in benefits. But you’d still get $590 in benefits. You’d also have that $2,000 in monthly earnings. Thus, you’d end up with $2,590 a month in overall income, compared with just $1,000 a month if you only collected Social Security and did not work. “It’s still usually worth it to go to work,” she said.

Keep in mind, too, that the forfeit of benefits is temporary. It’s not a tax; you’ll get back, later on, the benefits that you forfeited, Webb said. Here’s how:

• Once you reach full retirement age, the Social Security Administration will recalculate your benefit, essentially giving you credit for the months in which you forfeited benefits. Put another way, the agency will refigure your benefit, leaving out those months in which the agency reduced or withheld benefits because you exceeded the earnings limit.
• Each additional year you work adds another year of earnings to your Social Security record. To calculate your benefit, the agency looks back over your entire record of work and earnings and chooses the 35 years in which you earned the most. (The agency adjusts those earnings for inflation.) Thus, higher earnings for any given year could result in higher benefits later on. This can be especially helpful if your record includes “zero” years – in other words, years in which you earned nothing (because, for example, you took time out to raise children), Epstein said. If so, the years in which you worked, while also collecting Social Security benefits, will boost your monthly benefit later on, she said. “Your ultimate benefit will be adjusted upward,” Epstein said. (The agency does the recalculation automatically, once a year, usually in September or October, Czarnowski said. If an increase is called for, you’ll receive it retroactively. If you don’t want to wait, visit your local Social Security office earlier in the year, with your Form W-2 or information about your self-employment income, and ask for a recalculation, he said.)

In either case, the agency will mail you a letter spelling out your new monthly benefit, Czarnowski said.

Webb offered the following basic example, to drive the point home: Suppose that, if you waited until your full retirement age of 66 to start collecting Social Security, you’d receive a benefit of $1,000 a month. If you started collecting at age 62 instead, you’d receive a reduced benefit of $750 a month. (That’s because people who start collecting early take a mandatory cut in their benefits.) If you keep working while collecting, and earn $50,000 for the year, let’s say, you’d be well over the threshold, and you’d forfeit the entire $750 monthly Social Security benefit ($9,000 for the year). That sounds bad, but “That [money] is not gone forever,” Webb said.

If you stop working on your 63rd birthday in this example, you’d receive $800 a month from Social Security. So you would have “lost” that $9,000 in Social Security benefits. But you’d be collecting $50 more a month in benefits, or $600 a year. It would be increased each year for inflation (assuming a COLA applies), “and it goes on for as long as you live,” Webb said. What’s more, if you’re married and your spouse survives you, your spouse would receive a large benefit as a result, he said.

An even better option is to postpone collecting Social Security as long as you can – at least until you reach full retirement age, Webb said. That way, you’ll receive the full monthly benefit to which you’re entitled – without the reduction that you’d get for collecting early, he said. (If you’re married, your spouse would benefit, too.) One set of Social Security Administration figures shows the impact: For those who waited until full retirement age to start collecting, the average monthly benefit in 2007 was $1,262. For those who started collecting early, the average monthly benefit was $1,011. That’s a difference of about $250 a month, or $3,000 a year.

So remember the general rule: The earlier you start collecting, the lower your monthly Social Security benefit will be. The longer you wait to start collecting, the higher your monthly benefit will be. (Indeed, if you postpone collecting even after your full retirement age, you’ll generally be able to boost your monthly benefit even higher, through what’s known as the delayed retirement credit, available through age 69.) Epstein said, “I don’t think a lot of people are fully aware of what it’s going to cost them” to start collecting Social Security early.

Deciding when to start collecting benefits can be a daunting task. There are lots of factors to consider, such as your health, your life expectancy, and your tax situation. So consider consulting a professional for advice, Epstein said. She strongly recommends using a certified financial planner who is paid by the hour, not by commission. “It’s good to have a third party involved” who will focus solely on figuring out your best options, not on selling you financial products, she said.

About the author: Neil Downing, CFP®, is an Enrolled Agent with a master’s degree in taxation who has written three books on personal finance.

Resources

• Visit your Social Security Administration office, or call the agency toll-free at 1-800-772-1213, or use its Web site: www.socialsecurity.gov
• Social Security Retirement Earnings Test Calculator to see how work will affect your benefits: www.socialsecurity.gov/OACT/COLA/RTeffect.html
• Social Security Administration’s annual statistical supplement, showing levels of the retirement earnings test: www.socialsecurity.gov/policy/docs/statcomps/supplement/2008/2a29-2a32.html#table2.a29
• Social Security booklet, "How Work Affects Your Benefits," at: www.socialsecurity.gov/pubs/10069.html
• Author Lita Epstein’s Web site: www.litaepstein.com
• Layperson’s guide on when to claim Social Security benefits, from Boston College Center for Retirement Research: crr.bc.edu/social_security_guide

Worth reading
The Center for Retirement Research at Boston College has published the following reports:

• Pension Coverage and Retirement Security: crr.bc.edu/briefs/pension_coverage_and_retirement_security.html
• Impact of Immigration on the Distribution of American Well-Being: crr.bc.edu/working_papers/impact_of_immigration_on_the_distribution_of_
  american_well-being_.html
• How Seniors Change Their Asset Holdings During Retirement: crr.bc.edu/working_papers/how_seniors_change_their_asset_holdings_
  during_retirement.html
• Will Automatic Enrollment Reduce Employer Contributions to 401(k) Plans?: crr.bc.edu/working_papers/will_automatic_enrollment_reduce_employer_
  contributions_to_401_k_plans_.html
• Retirement Security and the Stock Market Crash: What are the Possible Outcomes?: crr.bc.edu/working_papers/retirement_security_and_the_stock_market_
  crash_what_are_the_possible_outcomes.html
• Actual and Anticipated Inheritance Receipts: crr.bc.edu/working_papers/actual_and_anticipated_inheritance_receipts.html