Did you earn too much in 1997?

Kiplinger's Personal Finance Magazine, August, 1998 by Stacy Stower

If you are under 70 years old and are still working while collecting social security benefits, expect an extra notice this summer. The Social Security Administration will let you know whether its notorious earnings test shows you received too much or too little in benefits last year. If it's too much, you'll have to pay back the excess. If it's too little, you'll get a pleasant surprise: The shortfall will be made up by a deposit to your bank account.

The SSA is in the process of sending such notices to more than 800,000 beneficiaries who are affected by the earnings limit--mainly retirees who work to supplement their retirement income. Last year the government sent out bills for about $600 million and refunds totaling about $450 million.

Beneficiaries ages 62 through 64 lose $1 of social security benefits for every $2 they earn over a certain limit, which increases annually (!t was $8,460 in 1997). Retirees ages 65 through 69 lose $1 for every $3 they earn over a higher limit--$13,500 in 1997. (For 1998, the limits are $9,120 and $14,500, respectively.) Once you're 70, you can earn as much as you like with no cut in benefits. The earnings test looks only at money you earn from a job or self-employment, not income from investments or other sources. Critics complain that this means the earnings test penalizes those retirees who have to work to make ends meet--and not those flush with investment income.

Each year affected retirees are supposed to estimate how much they expect to earn so that their benefits can be scaled back accordingly. Now the SSA is comparing those estimates with recipients' tax filings. Those who earned more than expected (or who failed to alert social security that they were still working) are being dunned for the excess benefits they received. But when a W-2 form shows that a recipient's earnings fell below expectations, social security issues a make-up payment.

In addition to settling up last year's account, all beneficiaries who work will receive a form this summer to confirm their estimate for this year's earnings and to project earnings for 1999. You can call the agency (800-772-1213) to enter your estimate. If you change your estimate for this year, your benefits will be adjusted for the rest of the year.

Before 1997, beneficiaries had to report earnings to social security each spring, so the earnings test could be applied. That filing is no longer necessary because the agency uses tax filings to get the information it needs. Although retirees applaud the reduced paperwork, the earnings test still sticks in their craw.

John Ferraro, 66, of Las Vegas earned more than the limit two years in a row and doesn't intend to make the same mistake again. When he started collecting at age 62, Ferraro said he had no idea he would be penalized for earning more than a certain amount.

"I earned something like $14,000 that year and the next, and ended up owing social security more than $6,000," he says. "It took me three years to pay off the debt. Now when I take a job, I make sure I earn under the limit. I'm not going to pay them any more money."

The earnings limits are raised each year. By 2002, retirees between 65 and 69 will be able to earn up to $30,000 a year without sacrificing any benefits.

RELATED ARTICLE: RETIREMENT WATCH

THE LATEST RETIREMENT REFORM PLAN

The latest package of social security reforms is the most comprehensive to date and calls for raising the retirement age to 70 and allowing workers to invest a portion of their contributions in private savings accounts.

The proposal, put together by a panel of business leaders, academics and members of Congress from both parties is designed to keep the retirement system solvent for 70 years without a tax increase. While congressional sponsors don't expect legislative action this year, they hope the plan will provide fodder for discussion--and possible enactment--in 1999, before the nation gets swept up in the 2000 presidential election.

The plan, which would affect you only if you are under age 55, calls for depositing two percentage points' worth of the 12.4% payroll tax into an individual savings account. You would have the option of investing the money in low- to medium-risk instruments, including a stock index fund, a bond index fund, a blended index fund and a government-securities fund.

The balance of the payroll tax would keep the system running much the way it does now, with current workers paying benefits to current retirees. However, benefits for upper income retirees would eventually be scaled back because the savings in their private accounts, based on their larger paychecks, would be more generous than those for lower-income workers. To reflect rising life expectancies, the proposal also recommends gradually raising the normal retirement age from 65 to 70 by the year 2029, and the early retirement age from 62 to 65 by 2017.

Other elements of the plan include eliminating the earnings test (see the article on this page), which reduces benefits if you keep working in retirement, and scaling back benefits paid to non-working spouses who have not earned benefits on their own.