The CBS news program “60 Minutes” ran a story this past Sunday that was critical of the Social Security Administration and the way the agency handles overpayments—money sent to Social Security beneficiaries that they were not due. I’m going to address that issue in today’s column. But before I do, I’ve got to put things in perspective.
If you watched the news story, you could come away thinking something like this: “Those dumb bureaucrats. They can’t do anything right. They are sending millions of dollars in incorrect payments to people every year!” But here is the dose of perspective you need to understand. Social Security is a $1.3 trillion per year program. And those millions of dollars in overpayments make up just one-half of one percent of the program’s annual payout. Or to turn that around, 99.5 percent of the time, people are being paid correctly. So, overpayments are a problem. But nowhere near as big a problem as sensational news stories would have you believe.
Still, millions of dollars are millions of dollars. And the Social Security overpayment problem is an issue that needs to be dealt with. Why do people get overpaid? The biggest reason has to do with a simple law that needs to be changed. More about that in a minute.
But first, let’s briefly deal with the main issue discussed in the “60 Minutes” story. Once it’s been decided that someone has been overpaid, should the SSA take the money back? “60 Minutes” essentially charged that the agency was being too ruthless in its overpayment collection efforts.
In a nutshell, one part of the overpayment recovery rules says the incorrect benefits must be repaid if the person who got the extra money was at fault in causing the overpayment. Most people probably would agree that part of the rules makes sense. But what if the overpayment was the agency’s fault? On the one hand, you could argue that even though the SSA made a mistake, the overpaid person still got money he or she was not due and the money should be repaid. But others would argue that the government screwed up and they should write off the overpayment as a loss. The rulebook actually says that even if the overpayment was the SSA’s fault, it must be repaid IF the overpaid person can afford to repay it. And carrying out that rule can really get messy and be subject to different interpretations.
And on that issue, let me make this point. Many years ago, the SSA interpreted that part of the law much more liberally and was writing off (“waiving” is the legal term) many overpayments. And guess what? There were news stories critical of the agency for “wasting the taxpayers’ money” by not more aggressively collecting overpayments. So, you can understand why an old civil servant like me might be inclined to throw up his hands and say: “OK, people, what do you want? Do you want us to collect these overpayments or do you want us to write them off?”
But we wouldn’t have to answer that question if a big part of the problem could be eliminated. So how do we do that? By getting rid of the No. 1 cause of overpayments: a provision of Social Security law that is rather archaically called the “annual earnings test.” It is sometimes also called the “retirement test.” (More about where those terms come from in a minute.) But I call it the Social Security earnings penalty. And I’ve never liked this law. Before I explain why, let me clarify what I am talking about.
The rules say that if you are a Social Security beneficiary who is under full retirement age and still working, one dollar must be deducted from your Social Security checks for each two dollars you earn over a limit that changes annually. It’s currently $21,240. (Once you reach your full retirement age, that penalty goes away.)
On the surface, the law seems pretty straightforward and you may wonder why it causes so many overpayments. Well, it’s because when you scratch beneath the surface, it is an absolute mess to administer. To illustrate, I'll use my own mother as an example.
Back in the 1970s, she was getting Social Security retirement benefits but she was working part time to supplement her rather meager monthly check. She would start out the year reporting her anticipated earnings to her local Social Security office. They would adjust her benefits accordingly, applying the one-dollar deduction for each two dollars earned. Then inevitably, as the year went on, she‘d work a little overtime or pick up a couple extra hours of work. She would dutifully report her change in anticipated earnings to the Social Security people, and further adjustments would be made to her monthly retirement checks. More often than not, she’d be charged with an overpayment and be asked to return some of her Social Security funds. Then maybe she‘d be laid off for a time, and her earnings would go down, and she’d file yet another report with SSA and there would be more adjustments to her benefits. Sometimes the SSA owed her some extra money.
Eventually, once the year was over with and she got her W-2 form, she would make a final report of her earnings to the Social Security office leading to yet another benefit adjustment—usually another overpayment. And on top of that, they would ask for an estimate of her anticipated earnings for the new year, yet more adjustments would be made, and the whole vicious cycle would start over again.
Even though my mom’s story took place in the 1970s, the same rules still apply today and the same problems still crop up today with millions of Social Security beneficiaries who are under their full retirement age but working.
I’ve always been puzzled by the earnings penalty law. From a philosophical perspective, I just don’t understand why someone should be punished if they try to work and earn a little money to supplement their Social Security benefits.
Having voiced that philosophical concern, I should point out that I know the practicality of the law. It goes back to the very beginning of Social Security in the 1930s. Retirement benefits were intended to replace earnings a person loses when he or she retires. Or to put that another way, a person had to retire to get “retirement” benefits. And this provision of the law was a “test” of their retirement status. (Thus, the term “retirement test.”)
Initially, the law said you had to be completely retired. But over the years, Congress eased up on that restrictive nature of the original law. They said people over FRA could work full time and get benefits. But they set up the messy earnings “penalty” for anyone under FRA. So, get rid of that penalty and you will get rid of millions of dollars in overpayments every year.
