Taking Social Security early hurts your spouse’s benefits, too

Most readers know that collecting Social Security benefits before full retirement age while still working can lead to a temporary reduction in retirement benefits. But did you know it can also reduce payments to family members — such as your spouse or minor dependent children — who collect benefits on your record?
Thanks to one of my loyal readers for pointing out this little-known provision.
“I recently found that your spouse’s spousal benefits are also withheld if you earn greater than the annual earnings test limit,” Alina Lee, a Social Security specialist with Cassaday & Co. Inc. of McLean, Va., wrote in a recent e-mail. “So if you make well above the limit, your benefits will be withheld and the Social Security Administration will also withhold any spousal benefits if needed.”
Ms. Lee, a paraplanner with the Washington, D.C.-area firm, noted that she hadn’t personally encountered this situation, as the firm’s planners usually recommend delaying Social Security benefits if clients are younger than full retirement age and still working. But she wanted to share the information nonetheless.
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I’m glad she did. I don’t think I’ve ever addressed this particular wrinkle. But with more than 2,700 rules in the Social Security Administration’s Program Operating Manual System, or POMS, I’m sure there are a few things I haven’t tackled.
When a worker files for retirement benefits, the worker’s spouse may be eligible for a benefit based on the worker’s earnings as long as that spouse is at least 62 or has a qualifying child under 16 (or a child of any age who receives Social Security disability benefits) in his or her care.
The spousal benefit can be as much as half of the worker’s full retirement-age-benefit, also known as the worker’s “primary insurance amount” or PIA, if the spouse is full retirement age or older, or less if collected earlier. However, if a spouse is caring for a qualifying child, the spousal benefit is not reduced regardless of the spouse’s age.
In 2014, if you are under full retirement age for the entire year and collect Social Security benefits while you continue to work, SSA will deduct $1 from your benefit payments for every $2 you earn above $15,480.
In the year you reach full retirement age, a more generous earnings test applies. SSA will deduct $1 in benefits for every $3 you earn above a higher limit — $41,400 in 2014 — but it only counts earnings before the month you reach full retirement age. Starting with the month you reach full retirement age, you can get your Social Security benefits with no limit on your earnings.
In addition to your own payment, any spousal benefit or child benefit payable on your record can be reduced because of your work.
“Spreading out that deduction to these other payments will more quickly pay off your excess earnings,” Social Security expert and author Andy Landis explained in his book “Social Security: The Inside Story.”
Mr. Landis also noted that these work deductions can be imposed on a child receiving benefits on your earnings record who is being raised by a former spouse. But reductions will not affect any payments to an ex-spouse who is collecting on your earnings record.
After you reach full retirement age, Social Security recalculates your benefits to leave out the months that your benefits were reduced or withheld due to excess earnings. So, if you collected reduced retirement benefits at 62 and over the next four years had 12 months of benefits withheld, at your full retirement age of 66, SSA would recalculate your benefits as if you had first collected them at age 63. Going forward, your benefits would be increased from 75% of your full retirement age benefits based on collecting four years early at 62 to 80% of benefits based on collecting three years early at 63.
Plus, if your earnings for the year are higher than one of the years SSA originally used to compute your retirement benefits, it will substitute the new year of earnings, which could further increase your retirement benefits.