Hi Larry, I was told if you earn over the allowed amount there is a penalty of $1.00 for every $2.00 over the allowed amount. Then i was told that penalty amount collected is returned once you reach your full retirement age. This doesn't seem correct

Hi,

Amounts withheld from a person's benefits as a result of Social Security's earnings test are NOT returned to the person when they reach full retirement age (FRA), at least in a direct manner. What happens instead is that when the person reaches FRA, his or her Social Security retirement benefit rate can be adjusted to compensate them for the fact that they weren't paid some of their benefits prior to FRA. That could permit the person to recoup some, all, or more than all of the benefits they lost to the earnings test in the form of a higher monthly benefit rate.

For example, say that Jane files for reduced Social Security retirement benefits 3 years prior to FRA, so her benefit rate is reduced for age by 20% as a result. Let's say Jane's FRA rate would have been $1000, but that amount is reduced to $800 in return for starting her benefits 3 years early. Then let's assume that because of Jane's earnings Social Security ends up withholding her benefits for half of that 3 year period. In that case, effective with the month that Jane reaches FRA her benefit rate would be adjusted to $900 to compensate her for the fact that she was only paid for half of the 3 year period that she was expected to collect benefits prior to FRA. In other words, instead of having her benefit rate reduced by 20%, starting with FRA Jane's benefit rate would only be reduced by 10%.

Doing the math in the above example, we find that $14,400 (i.e. $800 x 18 months) of Jane's benefits were withheld due to the earnings test. But, because of that withholding, her benefit rate is increased by $100 when she reaches FRA. Thus, if Jane lives for at least 12 years after reaching FRA she'll have recouped all of the benefits she lost to the earnings test in the form of her higher monthly benefit rate (i.e. $14400/$100 = 144 months, or 12 years).

Best, Jerry