When both spouses lose some or all of their Social Security benefits

If you collect Social Security benefits before your full retirement age of 66 and you continue to work, you can lose some or all of your benefits if your earnings exceed annual limits.

Normally, the earnings cap applies only to the person who is working. But if one spouse is collecting benefits on the other spouse’s earnings record, both spouses could temporarily lose some or all of their Social Security benefits.

Jon Smith, vice president of wealth planning at Stifel Financial Corp., wrote to me with an interesting question about this scenario.

“Let’s say I am 64 years old and I have been collecting my Social Security retirement benefits for two years,” Mr. Smith wrote. “My wife, a homemaker, is also 64 and collecting spousal benefits on my earnings record,” he continued. “Then I get a job offer and I am now making $100,000 per year,” he added. “How does the Social Security Administration apply the earnings reduction?” he asked.

Great question! I turned to SSA spokeswoman Nicole Tiggemann to explain the procedure.

“If a worker receives Social Security retirement benefits, his or her excess earnings are charged against the total monthly family benefit and reduces the total family benefit,” Ms. Tiggemann said. “The family benefit includes all monthly benefits payable to the worker and anyone else (e.g., spouse or child) entitled to benefits on the earnings record,” she explained.

“Depending on the amount of the monthly Social Security benefit and excess earnings of the worker, this can result in no benefit payable to the worker as well as other family members.”

That is what would happen in Mr. Smith’s hypothetical scenario as annual earnings of $100,000 would wipe out all of the couple’s Social Security benefit.

In 2015, a Social Security beneficiary under full retirement age for the entire year would lose $1 in benefits for every $2 earned over $15,720. Annual earnings of $100,000 would exceed the 2015 earnings limit by $84,280 ($100,000 – $15,720). Reducing Social Security benefits by the required $1 for every $2 over the earnings limit means benefits would be cut by a total of $42,140 ($84,280/2).

Let’s assume the husband’s benefit at his full retirement age is $2,500 per month or $30,000 per year. But because he claimed his retirement benefit four years early, they were reduced by 25%. So he collected $1,875 per month beginning at age 62 for a total of $22,500 per year.

His wife’s spousal benefit is worth 50% of his full retirement age benefit or primary insurance amount if she is at least 66 when she first collects it. But because she was 62 when she claimed spousal benefits, they were worth just 35% of his PIA. Therefore, she collected $875 per month or $10,500 per year ($30,000 x .35).

Together the husband and wife collected $2,750 per month or $33,000 per year ($22,500 + $10,500). Because of the husband’s excess earnings, the reduction ($42,140) would exceed the couple’s annual Social Security benefits ($33,000) so they would lose all of their benefits for the year.

In the year that the worker reaches full retirement age, there is a more generous earnings limit. In the months leading up to his 66th birthday, a worker could earn up to $41,880 in 2015 without forfeiting any benefits to the earnings cap. If earnings exceeded that limit, he would lose $1 in benefits for every $3 earned over the limit.

Once you reach full retirement age, the earnings cap disappears, meaning you can continue to work without forfeiting any Social Security benefits.

Benefits forfeited to the earnings cap are not gone forever. They are merely deferred. Upon reaching full retirement age, SSA would increase your monthly benefit to take into account those months in which benefits were withheld.

Mr. Smith posed another hypothetical situation with an added twist.

“Assume I am 64 and claiming on my own work record and my wife, who is 66, files a restricted claim for spousal benefits only,” he wrote. “If I get the $100,000 per year job, are her spousal benefits affected?”

Yes, even though the wife is full retirement age, her spousal benefits would be wiped out because she was collecting benefits on her husband’s earnings record and his excess earnings wiped out both his and her benefits. But in this case, she has another option. Because she has her own Social Security retirement benefits, she could collect on her own work history and her benefits would not be affected by her husband’s earnings.

(Questions about Social Security? Find the answers in my ebook.)