Which 2 Decisions Might Reduce My Social Security Income?

Senior woman with no money
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Today’s question comes from Terry:

“You mentioned losing Social Security benefits by continuing to work, deferring benefits and receiving higher payments later. I am aware of penalties for earning more than a certain quota after claiming benefits. I was not aware that a person could lose benefits.

Can you describe how benefits become deferred and increased? I thought if you claim at 62, you are stuck with the lowest monthly benefits?”

Reduced benefit, or merely deferred?

Terry: Your question involves two aspects of Social Security claiming. First, there is the reality of receiving reduced benefits due to claiming benefits before your full retirement age (FRA). Let’s start our discussion there.

You can claim benefits anytime after you turn 62. However, claiming before your FRA will reduce your benefit. Here your benefits are actually reduced, not deferred.

For example, if your FRA is 67, and you claim at 62, you will receive only 70% of the benefit you would have received if you waited until 67 to claim.

If you wait to claim after 67, your benefit will increase by 8% each year you delay claiming up to age 70. Waiting to claim after 70 will not increase your benefit.

The second aspect is the “earnings test,” or what some people are now calling the “benefit-deferral feature (BDF).” If you are subject to the BDF, some or all of your benefits can be withheld because of high earnings.

This new name is a better way of capturing what is actually happening, because the withheld benefits are not really lost; instead, they are merely being deferred.

People who claim Social Security benefits before their FRA will be subject to the BDF. (Note: The BDF does not apply once you reach FRA. At that point, you can earn as much as you want and none of your benefits will be withheld.)

Under the BDF, benefits will be reduced by $1 for every $2 in earnings over a certain level. In 2020, this level is $18,240. So, if you earn $22,240, you will lose $2,000 in annual benefits.

In the year you reach FRA — but before your birthday that year — you can earn $46,920 before benefits are withheld, and only $1 for every $3 you earn over this level is withheld.

When you actually reach your FRA at your birthday, your benefit will be increased to reflect the amount of benefits withheld.

How this can impact you

An example is the best way to see how this can impact you.

Suppose your benefit at FRA is calculated to be $1,500 — but instead of waiting until your FRA of 67, you decide to take your benefit at 62. Because you took your benefit so early, your benefit will only be 70% of your FRA benefit — namely $1,050.

If you do not continue working, then this is the benefit — adjusted for inflation — that you will continue to receive. When you reach FRA, nothing will change.

However, things change if you claim your benefit at 62, but decide to keep working.

If you continue working, earn above the designated level and some of your benefits are withheld, there will be an adjustment in your benefit when you reach FRA. If you lose the equivalent of one year’s benefits because of the BDF, your benefit at FRA will be increased to $1,125. That’s the benefit you would have received if you had waited one year and claimed at 63.

If your wages are so high that, because of withholding, you do not actually receive any benefits until you are 67, your benefits will be $1,500 at FRA. This is the same benefit you would have received if you claimed at 67, not 62.

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The questions I’m likeliest to answer are those that will interest other readers. So, it’s better not to ask for super-specific advice that applies only to you.

About me

I hold a doctorate in economics from the University of Pennsylvania and taught economics at the University of Delaware for many years. Presently I am teaching at Gallaudet University.

In 2009, I co-founded SocialSecurityChoices.com, an internet company that provides advice on Social Security claiming decisions. You can learn more about that by clicking here.

Disclaimer: We strive to provide accurate information with regard to the subject matter covered. It is offered with the understanding that we are not offering legal, accounting, investment or other professional advice or services, and that the SSA alone makes all final determinations on your eligibility for benefits and the benefit amounts. Our advice on claiming strategies does not comprise a comprehensive financial plan. You should consult with your financial adviser regarding your individual situation.

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