Social Security Penalties: What They Are, and How to Avoid Them

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Social Security Penalties - Baby Boomer

The amount you earn per month in Social Security payments is determined by a complicated algorithm that assesses the amount you’ve earned over your lifetime in government and non-government jobs. It’s also affected by the age at which you start withdrawing money, your additional earnings from other sources, and whether you already receive a government pension. Below are some of the penalties applied to Social Security earnings that you should know about.

Social Security Early Withdrawal Penalty

Technically, there is no penalty for early withdrawal—because you’re simply not allowed to start withdrawing Social Security benefits until the age of 62. However, the earlier you withdraw, the lower your monthly payments will be.

How early to start withdrawing Social Security is a complicated question and should be posed to a financial advisor who can take your personal situation in mind. If you withdraw early, your monthly payments will be smaller—but they will also give you extra cash to live on, potentially saving you from having to withdraw more from your retirement account and allowing your investment to accrue more rapidly. Some people need to start withdrawing as early as possible—because they don’t have the investments needed to support themselves on their own. Others can afford to wait.

The Social Security Earnings Penalty

Although you’re allowed to withdraw your Social Security money as early as 62, it might make financial sense to wait—especially if you have additional income coming in. The government will withhold some of your Social Security earnings if you make too much in income from other sources. This only applies to people under what the government calls Normal Retirement Age (NRA), which varies depending on the year you were born—but can be as high as 67. For more information on your NRA, check out the federal Social Security website.

The amount of money you’re allowed to earn in addition to Social Security can be quite small. If you’re attaining your NRA after 2011, you can only earn $14,160 over your Social Security benefits. If you reach the appropriate age during 2011, however, the exempt amount is $37,680—over twice as much. Once your earnings exceed the exempt amount, the government will withhold $1 in benefits for every $2 you earn over the lower exempt amount or $1 for every $3 you earn over the higher exempt amount.

For more information on how this applies in your particular earnings and exemption situation, check out

Penalties For Those Receiving Government Pensions

The Windfall Elimination Provision (WEP) reduces Social Security benefits for retired and disabled workers who also receive federal, state, or local government pensions based on their previous earnings. The reduction in Social Security benefits for this group can be significant—sometimes up to 60%. Check out the government’s Social Security WEP calculator to see how this provision might affect you.

The Government Pension Offset

In general, if you are a retired spouse, widow or widower, you’re allowed to collect additional Social Security payments based on your spouse’s earnings history. However, the GPO prevents you from collecting your spouse’s full benefits if you yourself were employed in a job that did not pay Social Security taxes. According to the government website, the Social Security benefits you’re entitled to could be up two two-thirds of your government pension.

The age at which you begin withdrawing Social Security benefits can have a big impact on your monthly earnings. So can your previous employment history. If you’re in doubt, check out the federal government’s online Social Security calculators—and talk to a financial advisor about the right time for you to start withdrawing. This will be different for everybody—and a professional can provide the best consultation.

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2 Responses

    1. Hey, Don – There is no actual penalty for not signing up until you’re 67 but your benefit will be less if you sign up earlier which can feel like a penalty since you’ll collect less. Here’s how they put it on the Social Security website:

      “A worker can choose to retire as early as age 62, but doing so may result in a reduction of as much as 30 percent. … For example, if the number of reduction months is 60 (the maximum number for retirement at 62 when normal retirement age is 67), then the benefit is reduced by 30 percent.”

      Regarding Medicare… it looks like they really want you to enroll during your initial enrollment period which starts 3 months before your 65th birthday. A late fee will apply if you miss this window. Here’s how they explain it on the Medicare.gove website:

      “Initial Enrollment Period—If you’re eligible for Medicare when you turn 65, you can sign up during your Initial Enrollment Period. This is a 7-month period that begins 3 months before the month you turn 65, includes the month you turn 65, and ends 3 months after the month you turn 65.

      ■ You can sign up for free Medicare Part A (Hospital Insurance) (if you’re eligible) any time after your Initial Enrollment Period starts. Your Part A coverage will start 6 months back from the date you apply for Medicare (or Social Security/RRB benefits), but no earlier than the first month you were eligible for Medicare.

      ■ You can only sign up for Part A (if you have to buy it) and/or Medicare Part B (Medical Insurance) during the times listed below.

      Important: In most cases, if you don’t sign up for Part B when you’re first eligible, you’ll have to pay a late enrollment penalty for as long as you have Part B and could have a gap in your health coverage.”

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