Tom Margenau
ARF! ARF! ARF! That’s not a dog barking. It’s the acronym for a little-known Social Security rule that may help some people who retired at age 62 and took reduced benefits but then decided to return to work and now wonder if their reduction is permanent. Because of ARF, it isn’t. ARF stands for “adjustment to the reduction factor.” It’s a software program built into Social Security Administration computers that kicks in after you reach full retirement age to compensate for benefits not received prior to FRA due to the Social Security earnings penalty.
Before I explain how the ARF works, I’ve got to give a little background, starting with a quick overview of the earnings penalty. SSA calls it the “retirement earnings test.” But I prefer to call it a penalty because, well, you get penalized if you are a Social Security beneficiary under full retirement age who is working and trying to make a few extra bucks.
Specifically, the law says that one dollar must be withheld from your Social Security checks for each two dollars you earn over a certain threshold that changes every year. The 2019 threshold is $17,640. So, to give a really simple example, if Hank is working and plans to make $21,640 in 2019, then $2,000 must be withheld from his Social Security checks in 2019. ($21,640 minus $17,640 equals $4,000, divided by two equals $2,000.)
Now, some more background. The law says that if you start your Social Security checks before full retirement age, your benefit will be reduced five-ninths of 1% for each of the first 36 months of reduction and five-twelfths of 1% for any additional months. That’s a bit too convoluted for what I am trying to explain in this column. I am going to keep things simple by saying that your benefit is reduced about one half of 1% for each month you start benefits before your full retirement age.
For example, let’s say that Hank’s full retirement age is 66. But he started his benefits when he was 65. That’s 12 months early, so his Social Security benefit was reduced by about 6%. In other words, at age 65, Hank started getting about 94% of his full retirement age benefit.
And with that bit of background, I can close the circle on my ARF explanation. In my above examples, I said that Hank started getting a 94% benefit rate when he took his Social Security at age 65. And because his earnings exceeded the penalty threshold, I pointed out that $2,000 had to be withheld from his 2019 benefits. Let’s assume his monthly check is $1,000. In other words, SSA held back two of Hank’s Social Security checks in 2019 because of his excess earnings.
Once Hank turns 66, the ARF program kicks in. That program says Hank’s ongoing permanent benefit can only be reduced for those months he actually received a Social Security check before he turned his full retirement age. In our example, Hank only received 10 Social Security checks in 2019. So instead of the initial 12-month, or 6%, reduction, Hank’s ongoing benefit is adjusted to give him only a 10 month, or 5%, reduction. In other words, starting at age 66, Hank will get a 1% boost in his Social Security check. Actually, the ARF program usually isn’t finished running until several months after full retirement age, but it will be retroactive to the month of FRA.
That was a very simple explanation of how ARF works. But in the real world, things aren’t always that simple, as illustrated in the following question and answer.
Q: I recently started my Social Security at age 62. I get $1,650 per month. Now, out of the blue, I’ve been offered a job that will pay me $35,000 annually. I think I’m going to take the job. But I’m in a quandary what to do about my Social Security. Can you advise?
A: Well, you’ve essentially got two options. You could simply withdraw your Social Security claim. (Anyone has up to 12 months after filing for benefits to change his or her mind.) If you do that, you’d have to repay any Social Security benefits you’ve received so far. Then, later on whenever you want (probably at age 66), you would re-file for your Social Security. It would be like you are just starting all over again.
Your other option would be to continue receiving Social Security benefits and let the earnings penalty and ARF provisions take their course. You will probably be due all, or almost all, of the remaining benefits you are due in 2019. But in 2020, 2021 and 2022, you will lose one dollar in benefits for each two dollars you exceed the earnings threshold for those years. I’m guessing that will be roughly $7,500 that will need to be withheld from your Social Security checks for each year. You said your benefit rate is $1,650 per month, or $19,800 for the year. That means that even though you will be making $35,000 from your job, you will still get about $12,300 in Social Security benefits each of the years 2020 through 2022.
In 2023, the year you turn age 66, the earnings threshold goes up to about $47,000. Your $35,000 salary is less than that -- meaning no penalty can be applied to you so you will be due all your Social Security checks from January 2023 on.
Then, at age 66, when the ARF kicks in, your benefit rate will be adjusted to remove the reduction factor for those months you didn’t get a check between age 62 and 66. I won’t bother trying to do the precise math, but I’m guessing instead of the initial 25% reduction you took for starting your benefits at 62, you will end up with something like a 15% reduction. So I bet your monthly benefit will go up from the current $1,650 to maybe $1,900 per month.
I’m not a tax guy. So I didn’t even consider what the tax implications would be if you took the second option and continued receiving benefits while you work. From only a Social Security standpoint, option two seems like an attractive choice. But you should talk to a tax expert to get the full picture.
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If you have a Social Security question, Tom Margenau has the answer. Contact him at thomas.margenau@comcast.net.
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