Earnings penalty rules concerning spouses can be confusing

Q : I filed for my Social Security benefits last year when I was 62. My wife, who never worked outside the home and who is the same age as me, signed up for spousal benefits on my account at the same time. Several months ago, I found a job that pays me more than Social Security allows. I reported this to the Social Security people. They are now withholding both of our checks. Why are my wife’s checks being held back? I’m the one working, not her. And this is especially irritating because my wife has a friend who is divorced and she is getting her Social Security benefits even though her husband is working. Can you please explain this?

A : I will try to explain. But first I want to give some background information to those of my readers who may be confused about your situation.

Regular readers of this column know that I am not a fan of Social Security’s earnings penalty rules. If I was the king of the Social Security world, one of the first things I would do is eliminate them. They not only keep people from getting benefits they should be due, but they are a mess to administer and lead to frequent cases of overpayment and underpayment of senior citizen’s Social Security checks.

But I am not the Social Security king, so we are stuck with the rules. And those rules say that if you are a Social Security recipient who is under age 66 and if you are working and making more than $15,720 per year, one dollar must be withheld from your Social Security payments for each two dollars you exceed that limit. So, for example, if you were going to make $28,000 in 2016, that is $12,280 over the prescribed limit. And half of that, or $6,140, must be withheld from all Social Security benefits due on your account.

You didn’t give me the money amounts involved in your case, so I will make some figures up to give you an example. Let’s assume you are getting $1,575 in Social Security retirement benefits and your wife is getting $735 in spousal support on your account. So we will say your combined benefits are $2,310 per month. And let’s use the earnings figures I used in my above example. In other words, we will assume you are earning $28,000 this year.

With those parameters, the law says that $6,140 (one-half of your earnings that exceed the $15,720 limit) must be held back from your and your wife’s benefits. In other words, they will hold back your full combined benefit payment for two months, or $4,620. That is still short of the $6,140 penalty amount, so another $1,520 would be deducted from a third month’s benefit payment, leaving you and your wife $790 in that third month ($2,310 minus $1,520 equals $790). After that, your benefit rate would go back up to normal levels — or $2,310 monthly.

Benefits are withheld from your wife because she is getting those benefits on your account. And it is your entire account that is being penalized for your excess earnings. If your wife was getting her own Social Security retirement check, then her benefits would not be reduced because of your income.

I obviously don’t know all the facts about your wife’s divorced friend. If she is getting her own Social Security checks, then as I just explained, those benefits could not be stopped because her husband is working.

But even if she was getting benefits as a divorced spouse on her ex-husband’s account, the law says her share of those benefits could not be held back.

So why can your wife’s benefits be stopped but not her divorced friend’s spousal benefits? Because you and your wife are married and living together, the law assumes that the money you are making at your job is supporting both of you. So the Social Security benefits lost because of those earnings are taken away from both of you. On the other hand, the law also assumes that your divorced friend is not being supported by her exhusband’s extra earnings. So her spousal support from Social Security should not be reduced.

Finally, if you think about it, it really doesn’t matter if they are withholding just your Social Security checks, or the combined payments to you and your wife. Going back to the example I used in your case, one way or the other, they are going to hold back $6,140 from your Social Security checks.

Whether or not that comes out of just your benefits, or your combined benefits, you’re still out $6,140.