16 Sep Will getting unemployment hurt my Social Security benefits?

Q. I lose 50 cents on the dollar on my Social Security if earnings are over $18,000 or so. Will I have to give Social Security back half of my unemployment over that amount? Does unemployment count as income?
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A. Let’s go over how Social Security benefits are calculated and what happens if you continue to work when you collect Social Security before your full retirement age.

The ultimate Social Security benefit you receive is based on all your earnings for your highest 35 years of “earned income,” said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

He said earned income consists of salaries, wages and self-employment income. Earned income is income where you and/or your employer paid Social Security taxes into the system.

“If you have a year with no income, you have a zero for that year,” Kiely said. “After you hit 35 years, each additional year of earned income will replace a year with zero earnings or low earnings.”

In order to take inflation into consideration, early years of earned income are adjusted for inflation.

If you continue to work after starting Social Security, your current earnings could possibly increase future Social Security benefits, Kiely said.

Then, if you receive unemployment compensation during one of your 35 best earnings years, it will not go into the Social Security calculation because unemployment compensation is not considered earned income.

Now let’s look at what happens to your current Social Security benefit if you begin collecting prior to your full retirement age.

When Social Security was first enacted in 1937, you could start to take your benefit as early as age 62. Your full retirement age was 65. The maximum earnings subject to Social Security tax was $3,000 back then, he said.

“If you continued to work between age 62 and 65 while you were collecting your Social Security benefit, there was a negative adjustment to your benefit if you had too much earned income,” he said. “Once you reach your full retirement age it doesn’t matter how much earned income you have. It will not affect your benefit.”

Now let’s move ahead to 2020.

If you were born between 1943 and 1954, your full retirement age is 66. If you were born between 1955 and 1961, your full retirement age inched up month by month. If you were born in 1962 or after, your full retirement age is 67, he said.

And, the 2020 maximum earned income subject to Social Security tax is $137,700.

“Currently, you can still take Social Security when you reach age 62, but there is a permanent penalty that reduces your Social Security benefit for each month prior to your full retirement age,” he said.

Additionally, there is a reduction to each year’s benefit if you have too much earned income, Kiely said.

In 2020, if you have $18,240 in earned income, it will not have a negative impact on your benefit. For every $2 you earn over $18,240, your benefit will be reduced by $1.

“If you earned $18,240 and received the extra $600 in COVID unemployment benefits for six months — $3,600 — it will be subject to federal income tax, but it will not reduce your Social Security benefit because the $600 is not earned income subject to Social Security tax,” Kiely said. “Again, once you hit your full retirement age, there is no limit on your earned income.”

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This story was originally published on Sept. 16, 2020.

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