SLEDGE: Are Social Security benefits increased to make up for early collection?

Q: I retired at age 62 and started receiving reduced benefits. My wife also started receiving reduced benefits at age 62. In the January 2009 issue of “Money” magazine, page 100, it says: “Once you reach full retirement age, the size of your check is increased to make up for any benefit reduction you experienced.” Am I reading this article correctly, that we are now eligible to receive full benefits since we have reached our full retirement age? — Don T.
A: Don, when I first read your letter I thought: this must be a misquote. This can’t be what was actually said. So I made a point of finding the article and reading it, and sure enough, that’s what it says. And while it does flesh out the facts a bit more than this, it’s still misleading, and shows what can happen when a critical detail is omitted.
The article touches briefly on the issue of working after entitlement to Social Security benefits and how earnings over a certain level can cause benefits to be reduced. But a fuller explanation is needed. First, understand that how much you’re allowed to earn before it causes a reduction in your benefit depends on your age. In 2009, the limit will be $14,160 for those persons receiving benefits who will not reach their full retirement age during the year; for those who will reach their full retirement age during the year, the limit is $37,680 from the start of the year up until the month they reach full retirement age; and from full retirement age on, there’s no limit at all. And for the first stage, earnings over $14,160 will reduce the benefit by $1 for every $2 earned over the limit, whereas for the second stage, earnings over $37,680 will reduce it by just $1 for every $3. Finally, bear in mind that in this entire discussion, the only money that’s counted is earned income: gross wages from employment or net earnings from self-employment. Pensions, dividends, interest, rental income, inheritance money: none of this counts towards the limit.
Now what happens if you elect entitlement early — say, at 62? Well, as you know, you take a cut in your benefits. If you were born between 1943 and 1954, for example, your full retirement age is 66. So starting entitlement at exactly 62 would mean a 48-month reduction. We call this having a reduction factor of 48. It causes an approximate 25 percent reduction to your monthly benefit amount. If that benefit amount at your full retirement age is $1,600, then entitlement at 62 would reduce the payment to $1,200, or 75 percent of the full amount. But now let’s take it further, and say that you kept working after entitlement. Maybe not full time, but still earning more than the limit. Let’s say you make $26,160. At that rate, you’d exceed the $14,160 limit by $12,000; and when we apply the $1-for-$2 rule, this means we’d have to withhold $6,000 in benefits. With a monthly benefit of $1,200, we’d have to hold back the first five checks we could pay you in 2009. If we continued to withhold five checks each year prior to your full retirement age, this would mean no benefit payments in 20 of the 48 months during the four-year period preceding age 66.
Now once you’ve reached your full retirement age, the system automatically performs an operation called an ARF — adjustment of the reduction factor. In effect, the computer says this: “When we initially awarded this fellow benefits at age 62, we used a 48-month reduction. But now that he’s reached his full retirement age, how many of those 48 payments did he actually receive?” And since we’d withheld 20 of them, that means you received only 28. So the reduction factor is adjusted from 48 to 28; and instead of $1,200, your benefit from full retirement age on would be increased to $1,351, with a reduction of only about 15.5 percent rather than the initial 25 percent.
So the statement that “once you reach full retirement age, the size of your check is increased to make up for any benefit reduction you experienced” is not quite right. It neglects to add that the reduction will be adjusted to eliminate only those months in which you did not receive a benefit payment due to excess earnings.
To read more on this, try this link to our Web site, Social Security Online at http://www.socialsecurity.
gov/retire2/whileworking3.htm.