Social Security shortchanged some older workers, survivors

With nearly 65 million beneficiaries and about 2,700 rules governing the payments to those beneficiaries, it’s not surprising that sometimes the Social Security Administration gets things wrong.

Two new audit reports released this month by the SSA’s Office of the Inspector General found that two groups of beneficiaries — older workers who claimed Social Security benefits before reaching their full retirement age, or FRA, and surviving spouses subject to Social Security benefit offsets due to their government pensions — could collectively be missing out on millions of dollars.

OLDER WORKERS

Social Security benefits are intended to replace lost earnings when an individual retires. When a recipient who claims benefits before full retirement age earns wages or self-employment income that exceed certain levels, SSA reduces his or her benefits to account for these excess earnings.

In 2020, a beneficiary who is younger than 66 for the entire year would forfeit $1 in benefits for every $2 earned over $18,240. That earnings limit will increase to $18,960 in 2021, and full retirement age will rise to 66 and 2 months.

Once a beneficiary reaches full retirement age, he or she may earn any amount of wages or income without a reduction in benefits. In addition, SSA must adjust the monthly benefit amount to provide a credit for each month that a beneficiary did not receive a benefit as a result of excess earnings, resulting in a larger monthly benefit at full retirement age and beyond.

In an audit report, “Improper Payments to Retired Beneficiaries Who Worked Before Full Retirement Age,” the OIG identified 7,477 beneficiaries who had their monthly benefit reduced due to excess earnings on or after January 2000 but whose monthly benefit amount was not adjusted when they reached full retirement age.

From this population, the OIG selected a random sample of 100 beneficiaries to review. The audit found that SSA did not properly adjust the benefit amounts for more than half of the beneficiaries in the sample -- 53 out of 100 people.

“Based on our sample results, we estimate SSA improperly paid 3,963 beneficiaries approximately $6.9 million,” the report said. “If SSA does not take corrective action for the remaining beneficiaries, we estimate it will improperly pay these beneficiaries approximately $1.4 million over the next 12 months.”

In most cases — 38 out of the sample of 53 people affected — the improper payments were underpayments.

As of January, SSA took corrective action for 13 of the 53 beneficiaries who were identified in the sample audit of 100 people and resolved improper payments totaling $15,632. The OIG recommended that SSA take corrective action for the remaining 40 beneficiaries in the sample, as well as the 7,477 people identified in the broader audit.

SURVIVORS SUBJECT TO PENSION OFFSETS

Generally, Social Security benefits are reduced for widows and widowers who receive a pension based on their own work for a federal, state or local government that was not covered by Social Security. The reduction, known as the Government Pension Offset or GPO, is equal to two-thirds of the government pension.

When individuals apply for survivor benefits, SSA must determine whether they are receiving or expect to receive a pension based on work not covered by Social Security. In addition, SSA employees must explain the advantages and disadvantages of filing an application so claimants can make an informed decision.

Widows and widowers are eligible to file for survivor benefits as early as age 60, but they have the option to delay their application up to their full retirement age to increase their monthly benefit amount.

An OIG report, “Benefits Payable to Widow(er)s Subject to Government Pension Offset Had they Delayed Their Application,” identified 21,532 widows and widowers who applied for survivor benefits but did not receive any payments because at that point, two-thirds of their government pensions exceeded their survivor benefits.

“Had SSA informed them of the option to delay their widow(er)s application, they may have been eligible for benefits at a later filing date,” the report said.

The OIG estimates that 1,938 widows and widowers — 9% of the pool of identified beneficiaries — would have been eligible for about $12.8 million in benefits had they delayed their application for survivor benefits until they reached full retirement age. In addition, 1,615 of those widows and widowers could receive approximately $42.6 million in additional benefits over their remaining life expectancies. On average, each widow or widowers could receive an additional $26,400 in benefits.

The OIG recommended that SSA take appropriate action to notify the individuals identified in the audit of their option to withdraw their application, if eligible, and reapply for survivor benefits later when they would be worth more. In addition, the report urged SSA to “remind employees to discuss the advantages of delaying an application when widow(er) claimants are subject to GPO.”

The SSA agreed with all the recommendations in both reports.

For financial advisers, the takeaway is be aware of how earnings restrictions or government pension offsets can reduce Social Security benefits and encourage clients to ask how their benefits were calculated.