Sunday, January 13, 2008

Many people get tripped up by SSA earnings limits that go with early retirement


Today, I got a question from someone who got tripped up by Social Security on earnings limits before full retirement age. Although I won't reproduce the person's details here, I'll write what I think is a general answer for this kind of problem. Here is how I answered it, with a little bit of generalization for a public blog.

Obviously, any claimant would need to talk to an SSA attorney oneself to take any action or to contest a SSA recoupment of a purported overpayment. Sometimes a recoupment is waived if it would "defeat the purpose" of the SSA retirement program. Here is a place to start hunting for an appropriate attorney.

The visitor had trouble getting a copy of SSA's exact rules. But the precise administrative regulations for paymnents are available online, here.

The main reference to the Social Security Manual is here. It is called the SSA Policy Information Manual System, or POMS. The specific reference for the Annual Earnings Test is here.

Social Security Administration representatives are supposed to follow the rules in the POMS manual "to the letter" in specific cases. They are supposed to use as little personal discretion as possible.

Generally, SSA rules are strict about earnings when you "work" for someone else. What doesn't count is income from pensions, investments, 401K withdrawals, etc. (Here is an important summary reference in "baby language", not from POMS). From the viewpoint of social policy and fairness, I don't think that the earnings limit makes any sense any more. The rules ought to be changed, but Congress would have to do that. SSA says it just has to follow the laws made by Congress. I would write my own congressman (woman) in your area and ask for his/her views on it. Most people in Congress respond to questions like this promptly and most of them have email links on their websites. The main House website is here.

Social Security has specific rules when you "retire from your own business" here.

Social Security may also question if you go to an employer (especially a previous employer) and take less money in order to receive social security before full retirement age. They will expect you to press your employer to pay you a "fair market wage" for your work, something like what you made before. This is like the "Wal-Mart Problem". They don't want companies to take advantage of social programs to pay workers less. This is a legitimate question of public policy.

Anyone who goes back to work "for someone else" after starting social security before reaching full retirement age should proceed carefully, and negotiate properly with the employer, and then notify SSA. One should be paid the full market value of one's work. It may be advantageous, even if working as a consultant for a former employer, to work for a staffing company that provides benefits and 401K matching. If it wise to consult with a union or guild (like SAG or WGA) if that is relevant to the job one is taking, to make sure one gets all compensation for which one is entitled from an employer. If the job is specific in nature and the employer needs the skills of the employee who had retired, the employer may be willing to pay more if pressed. Many jobs will pay enough that Social Security will be stopped entirely until reaching full retirement age or else retiring again, but when payments are resumed, they should be higher, to reflect actuarial factors as well as (often) a longer record of SSA FICA tax payments making the average for the best earnings years higher.

When one goes off on a new track and freelances (as a "starving artist") one generally has to report the income one actually earns, but it does not seem that SSA gets overly concerned whether one could earn more or "lowballs" because one has retired. The situation when drawing state unemployment insurance may be different, depending on the state. (I have not found any rule that would could unemployment compensation as "earnings.") People who earn commissions by sales jobs (either in "pyramids" or in more formal positions as insurance agents) -- activity that people sometimes start after "retiring" -- generally must report these as income when the work that earned the commissions (closure of sale) is completed, but it can be complicated. In life insurance both original and renewal commissions appear to "count". The most important POMS reference is here, but there are several other specialized rules there in the POMS index.

Picture: Bobbleheads for Washington Nationals 2008 season in new ballpark.

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